Don’t lend money you can’t afford to lose

In the summer of 1989 a bright-eyed finance student loaned $1500 to a bushy-tailed young engineer.

No, this isn't one of those stories where we purchased a thousand shares in Apple at US$1.50 each and now have glutinous profits in excess of $100,000.

His Holden is most likely on the scrap heap along with young love and lesson in stupidity.

My financial skills were a long way from the efficient frontier when weighing up the risk and return of that transaction.

Luckily, fathers of 19-year-old daughters will happily act as debt collectors and a cheque appeared in the post, still quivering in fright.

In any informal lending arrangement, there tends to be a little more emotion than good sense involved. No one wants to see family or friends suckered into a spiral of debt and high interest costs. For many, the problems are short-term and stem from unforeseen circumstances, such as a job loss, illness or a broken relationship.

For others there is no other way of getting an education, house, or funding a business start-up.

Our emotions explain why the Bank of Family and Friends is a global financial powerhouse, with billions of dollars, euro, pounds and yen passing through its corridors. What is less obvious is the amount of smoke billowing from the chimneys.

The money or the friend?

Surveys show the average Briton lends £2,250 (NZ$4090) informally over their lives. Unpaid loans are estimated at a staggering £44 billion (NZ$80 billion).

It seems that repayment is considered more than optional. A survey on money etiquette showed around half of us have loaned money to someone, but 55 per cent don't get repaid. It was also reported 57 per cent of people have had a friendship or relationship ruined by unpaid debt.

There's often a wag with a comedic spin on the topic. "Always borrow money from a pessimist. He won't expect it back". Or, "Before borrowing from a friend, decide which you need more".

When it comes to the speed of repayment, genes play a role. If you're family, the average person will give you nine weeks to settle a small loan.

Less tolerance is shown with friends who only get six weeks. The message; repay it pronto.

Given the statistics, perhaps it is true that you shouldn't lend money you can't afford to lose. A bank or professional lender would never survive this carnage.

Morgan Stanley research shows the impairment rates of non-housing loans at Australian banks are estimated at 0.57 per cent in 2016. In the global crisis of 2009 these spiked to 1.69 per cent. That's barely a ripple compared to 55 per cent sinkhole at the Bank of Friends and Family.

The numbers are upsetting. Do we really dislike our nearest and dearest 54.43 per cent more than an Aussie Bank? A harsh conclusion, but surely we are taking advantage of each other.

Men vs. women

Psychometric testing has been used by researchers at The Innovation Bubble to look at differences between men and women.

How many of us are comfortable lending money to:

1. Partners? 96 per cent of men and 90 per cent of women.

2. Family? 68 per cent of men and 70 per cent of women.

3. Friends? 66 per cent of men and 50 per cent of women.

4. Colleagues? 21 per cent of men and 11 per cent of women.

The result is that men are more generous. But don't get too smug. There is a suggestion this is driven by men's desire to demonstrate status and success, while women are twice as likely to feel anxious about asking for money back.

How to say yes and no

Yes I will lend you money

• We need to be clear. Is this a loan or gift?

• I need this in writing.

• We need an independent friend or solicitor to listen to our arrangements.

• I need a timeline on repayments.

• What factors could affect your ability to repay me?

• I need you to know how this will impact me if the money isn't repaid.

• If this went wrong how would we react to each other?

No I won't lend you money

• I'm sorry it's a bad time and my own commitments are too high.

• That amount isn't in my budget.

• I'm going to have to find other ways to help.

• I know how hard it must be to ask, but our friendship is just too important to risk.

• I can give you a small amount as a gift and that way nothing changes between us.

• I can help you research what the bank's requirements are and whether you'd be eligible.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.