Personal Loans Amongst Friends Hazardous to Relationships

Paper person burnt by fire
A recent study by Carnegie Mellon University revealed that the lending and borrowing of personal loans amongst friends and loved ones comes with many consequences that affect relationships.

George Loewenstein, a professor of economics and psychology, and the head of this study, claims that both personal loan borrowers and lenders sometimes present self-serving bias in these common transactions.

“This research fits with a wide range of earlier research showing the pernicious effects of self-serving conceptions of fairness,” said Loewenstein in a press release. “It provides further evidence that people’s tendency to confuse what is in their own interest with what is fair is a major source of disagreements between people.”

For instance, the study revealed that borrowers of friend- or family-originated personal loans are more apt to believing a “loan” was a gift. Lenders, on the other hand, are more likely to contend that money given to another was an actual loan.

Borrowers are also more prone to believing that their lender approached them with the offer of money, while lenders tend to believe that borrowers approached them with a plea for money.

Similarly, when a dispute arises and a borrower fails to repay a personal loan, borrowers are more likely to claim they will repay the money at some point. Lenders tend to be more pessimistic, believing they’ll never see their money again.

Loewenstein also discovered that borrowers tend to be unaware of any negative feelings directed toward them by a lender after borrowers default on a personal loan.

“This research provides empirical backing for the many adages cautioning against lending to a friend: lending can be hazardous to a relationship,” explained Linda Dezso, a pre-doctoral candidate in economic psychology at the University of Vienna who helped Loewenstein with the study.

One such adage, “Before borrowing money from a friend, decide which you need most,” was cited by the press release and it can be argued it has certainly received a boost in credibility as a result of this research.

“That doesn’t mean you should never lend money to a friend—personal loans can be lifesavers in many situations in which commercial loans aren’t feasible; but the research does strongly support the idea that it is a big mistake to borrow money from, or loan money to, a friend, if both parties aren’t confident that the loan will be paid off in a timely fashion.”