Borrowing money from family and friends has always been rife with hazards

November 15, 1992|By Los Angeles Times

The problem with borrowing money is that if you really need it, bank probably won't give it to you. Loan sharks charge too much, and stealing is illegal. So we fall back on friends and family.

The practice is at least as old as currency. Borrowing from parents, spouses, friends and other loved ones has always been fraught with emotional peril.

Practitioners in the emerging field of financial psychology are just as wary of money's power to upset relationships. "Money shifts the dynamics of any relationship," says James Gottfurcht, a financial psychologist and personal finance author.

Possible side effects: The lender may assume a power position, feel controlling, and expect to be treated with greater deference. Mr. Gottfurcht says that those tendencies can be subconscious, so even if the parties are mature and well-adjusted, the relationship may be strained.

"It changes the currency of the relationship to a currency of obligation, shame and guilt," says Kathleen Gurney, a financial psychologist and author in Cincinnati.

That is especially true when turning to First National Mom and Dad.

"Borrowing from your parents puts you back in a very childlike position," she says.

Problems most often occur because the loan terms are left vague. Children don't want to think of parents as creditors. Neither party is sure when or how the money will be repaid. All are uneasy.

When it comes to borrowing from friends and family, a dime's worth of prevention is worth a dollar of cure. The best way to avoid tensions is to be businesslike about it. Otherwise, Ms. Gurney warns, "it can destroy the intimacy of the relationship."

If it's clear that the loan can't be repaid relatively soon, agree on a structured payment plan. That eliminates a borrower's natural tendency to assume that he can service the debt at his leisure. And it saves the lender from second-guessing when she sees the borrower spending money on something else.

"Make sure it's clearly understood what the terms of the loan are," warns Robert Gardner, a certified financial planner in Los Angeles. "Write it down. People think, 'It's family, it's friends, don't bother to write it down.' Wrong!"

Another touchy subject is interest. People feel uneasy charging interest to a friend or loved one. On the other hand, money isn't free. Consider the investment interest forgone during the loan, not to mention the risk of default.

"It's up to the two individuals to iron out," says Mr. Gottfurcht. "Some families have a deep businesslike ethic, but I have a more unconditional attitude. I think it's nicer if you can do it without interest."

Then there is the question of borrowing from one's romantic partner. "If at all possible, don't do it," Ms. Gurney says. "Love is very fragile."

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