Why Borrowing Money From Friends Can Backfire

Many of us know the painful feeling: An unexpected expense comes up, and we don’t have the cash the pay for it. In fact, due to inflation and the increased costs of living, almost half of Americans can’t come up with $1,000 on short notice (Horvarth, 2024). That can mean having to delay a necessary medical procedure or urgent repair of a car or washing machine. But the feeling can be just as painful if the expense is purely for pleasure—for example, not being able to afford a trip to a wedding or a concert.

What to do? Credit card overdrafts can be prohibitively expensive, and many people already face debt from student loans or mortgages, such that adding additional debt to their balance seems risky. This is when many of us might turn to friends to borrow the money. This solution sounds advantageous at first. Friends typically don’t charge interest, and chances are that friends help each other out in enough ways over time that a one-time loan doesn’t upset the friendship.

However, recent research by Ashley Angelu and colleagues (2024) suggests that there are pitfalls when borrowing money from friends. Specifically, the friend might feel entitled to judge what the debtor spends the borrowed money on and might get angry if they deem the spending frivolous or unnecessary. In one of their studies, 460 participants from an online panel imagined that they had given a friend $60 as a gift, a loan, or a payment for work. The friend then spent the money either on a textbook or on a video game. When the money was a gift or a payment, people didn’t judge the friend regardless of whether the money was used for a necessary textbook or a pleasurable game. Yet if the money came from a loan, people were angrier at their friend for spending the cash for the game than for the book. Further studies showed that this judgment came from lenders’ feeling that they deserved oversight over the borrowed money. As a lender, people felt they should have some control over how the debtor spends the borrowed money.

If this is not enough of a cautionary tale, the authors discovered another interesting pattern. The judgment persisted even after the debtor had repaid the loan. In other words, even when people have been paid back the $60 they lent and then learned that the debtor spent their money on something deemed frivolous, they were angrier than if the debtor bought something that was necessary. The perceived right to oversight persisted even after the loan transaction was over and done. Borrowers on the other hand felt that lenders deserved much less oversight over the money.

This discrepancy between lenders and borrowers should be a warning because anger and the perceived right to oversight don’t mix well with a healthy friendship. But what if we really can’t come up with cash and a friend offers a loan? Being aware of their potential desire for some oversight can help, and also explaining to them why the purchase is necessary. Even if something at first appears frivolous, they might feel better if they learn how much the pleasurable expense means to the borrower. Or, even if it’s difficult, building up a rainy day fund so that no debt is needed might be easier after all than borrowing from and then dealing with an angry friend.