Taking Personal Loan to help a friend ? How it can impact your financial life ?

POSTED BY manish ON October 28, 2013 COMMENTS (43)

“Friendship is Forever” – One of the best relationships in this world is Friendship . You are close to your friends  more than your relatives or in some cases even family members. You can go miles to help your friends, spend time and effort for them or even help them financially at times. But there is difference between helping a close friend and any friend.

Personal Loan for friend

Some investors are very casual about their financial decisions which they take for their friends or any relative who is not very much close to them. Its the social pressure or the want of “looking good” in front of others which leads to this situation. Now I do not say that you should not do favors for your friends . Even if you are having some loss, its fine at times to help your friends financially , but just make sure you are aware about its impact on your financial life. It should not happen that you repent it later and regret it. For example one of the mails I recently got was this

My friend is in need of Rs 10L and i am planning to give him money by taking personal loan and going to collect interest which i am going to pay for personal loan. In this case i have not got any profit. Will there be any tax for interest collected from my friend. (source)

This guy was going to take a personal loan for his friend on his name (or swiping credit card and taking cash later from friend) and collect the EMI part from friend and pay it back . Now it was a help because the other friend might be in need of money and being a good friend he was helping. But the problem was that he was not aware what it could mean to his financial life.

Impact on Credit Report in this case !

In this case , if you see there will be a entry in his CIBIL report about the personal loan part and being a unsecured loan, its not a very positive thing on someone’s Credit Report . Now what if after 2-3 yrs he needs a home loan and the lender does not want to lend him because he has a personal loan on his credit report ? The assumption is that friend will pay the EMI to him on time , but what if the friend loses the job ? What if something happens to friend like accident or sudden death?

What if loan is not repaid on time and then your DPD sections on Credit Report is messed up . The impact of this on the loan eligibility will be high and one will really regret it later, but then it would be too late. Below are some more experiences of lending to friends and relatives and then suffering later …

Hitesh shares his personal experience

Yes. I have helped a friend in his financial down for continuous 3 years.I have taken personal loan for him on my name which is still running and he does not pay EMI regularly (but I do).Because of delay in getting EMI’s from him my financial situation got worsen by months.

Above all that i have given him money very frequently and all my plannings went on toss. Because of friendship i have been digged down under as i have not got full money back yet. Personal loan taken will end in November 2014.

I want to apply for home loan next year i.e March 2014 and after reading this i am in very uncertain state though i maintain a cibil score of 720.

Brundaban shares his experience..

I’m also a victim of this painful personal loan lending to a friend. In 2007 i gave a friend 10lakh as personal loan, everything went on smoothly, but after 6 months the real drama started, he didn’t pay the EMI in time so i had to pay penalty with interest, sometimes i used to pay from my salary, it was totaly difficult for me to pay the EMI as it constitutes 70% of my salary then, still i was getting frequent calls from banks to pay.

When i opposed he didnt pay the loan, switch off his mobile, even told he dont know me,so i thought that i wont pay now, then stopped payment, and after going to his home many times he agreed to settle the loan, and finally settled on 2010, with a condition that i’ll pay him 2 lakh, even i did that, still i’ve not recovered the same amount from him, now if someone even ask me for 5K i think 100 times, bocz of this situation, so suggest friends dont give any personal laon to anybody!!!!

Divya’s experience

I have the experience-its painful. My brother gave 7L rs to his close friend. he did not take it from his pocket-he has taken two loans, and gave. and one fine day, he committed suicide, reason- the friend ditched him. He did not bother about the money-what bothered him was the breach of trust that he had in his close to heart friend.We lost him. his wife and kids are orphaned. Never help anyone out of your way. we can make up for the money lost- but the person we lost, we can never get him back.

Sivamohan shares his experience

Some years back my father helped my uncle my getting him some loan from a local lender(at very high interest) and by becoming a guarantor for his son’s educational loan. My uncle was not able to repay the loan and my father ended up paying the principle and interest. And since this incident our family relationship has become very sour. Recently my father received a letter from the bank saying his son hasn’t paid the educational loan back. We often wonder all things would have been fine if my father had just said no.

What other casual decisions investors taken for friends ?

  • They become guarantor for their friends without understanding its impact – Read more about it
  • They transfer money to and fro to each other accounts, without understanding its tax implications – Read more
  • They handover their important documents to friends without realising how they can be misused by someone if the intention is wrong – read more about it
  • Lending them money and not asking it back thinking that relations will soar – But the point is if you do not have space to talk freely about asking money back – the friendship is already on the rocks then !
  • Buying financial products from friends who are agents or brokers and then paying the premiums for useless products for years and destroying your wealth creation process.

At times, you do not have a choice, but to go a ahead and help a friend even if it means some problem for you, thats fine . But in cases where the other party can be said – NO , or the impact of your decision on your financial life can be bad , which you can not afford, you have to think hard and take tough decision

Have you done any financial help of friends and what do you think about it ?

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43 replies on this article “Taking Personal Loan to help a friend ? How it can impact your financial life ?”

  1. Credexpert says:

    Dear Joe,

    Since you are the borrower and the loan is on your name, in the view of the bank, you are solely responsible for the repayment. You need to ensure the said parties repay the amount you have given them within the stipulated time.

    You can of course approach the bank – if you need more time to repay, they may restructure your loan. However, your situation is complicated, and it will depend on the bank consider it.

    Please stop lending any further amounts or taking any more loans or swiping your credit cards. It is your credit standing that is being effected and will impact your future credit requirements.

    Regards,
    Credexpert

  2. Joe says:

    I lent money that I had and further took personal loan and gave that to friend as well. Now I’m in huge debit to bank and to my friends who is still supporting me.

    I’m able to focus my mind on anything else. Always thinking about how to pay next due, next due.

    I will use alternate names, please bare with me for other confusion as well.

    1) First confusion and mistake.

    Person who wanted money PartyA. Actual money transfered(NEFT) to PartyB on request of PartyA.

    No other proof other than bank transaction (Recently PartyA gave me his signature in Rs.100 empty stamp paper). Let me know if any proof needed, what should I do incase PartyA not willing to give proof now. If I get proof now will it be okey.

    Initially money transferred from my savings.

    2) Second confusion and mistake

    Later on request of PartyA in Aug’12 I took a personal loan of 4 Lacs for 48 months tenure on oral promise of the loan will be pre-closed within 6 months and return of 5% each month on what ever money I have given so far by doing intraday trading in their account. Same month I lost my job (im bread winner for me n my mom)

    3) Allowed PartyA to use my credit cards for 75,000 in one and 79,000 in another.

    4) Obtained 1.2 lac loan in credit card for PartyA and NEFT to PartyB.

    Initially for few months PartyB transferred money so that EMI can be paid, soon after 4 or 5 months (May’13) no more money was paid to me since.

    And till now(May’14) I’m jobless but I have been paying EMI and minimum due, now I have run out of funds and friends support.

    PartyA says will give money when possible, if you want go to Police. Its the same answer everytime.

    Will I be able to recovery the money if yes how soon can I recover. What should I do to recovery the money.

    Should I inform the bank about the situation and tell them about PartyA. Or should I wait for the bank to contact me after I stopped paying.

    Will the bank accept my situation and give me time to repay.

    1. Thanks for sharing !

  3. Dharmesh says:

    I had also helped my in-laws few thousand rupees 5 years ago. They said they will return back with interest within next 6 months. Till today they have not paid back a single penny! Whenever I ask for it, they repeat the sentence that they will pack back with interest soon.

    After this incident four more persons requested me a financial help. Looking at the previous experience I simply said NO.

    I suggest the following for the first timers or 2nd (or 3rd) timers who have been requested for financial help to give following excuses to save themselves:

    1. Tell your friend/relative that you have already helped somebody (A) and awaiting payment from A. I will help once I am repaid by A.
    2. Ask him for some guarantee (say jewellery) and they will never turn back. Because generally they want free money not to be retuned back to you.

    1. Good point , Thanks for sharing that incident with us !

  4. kaushik says:

    although its a old post but still I wanted to post here since after reading these experiences of others I think I am one of the luckiest person in the world to have such great friends.

    This friend of mine took money from me. he could not return that to me on time. He was so very ashamed of it that, he came to me with ornaments of his wife and wanted to take me to jewellery shop so that I can take my money back (by selling those). Stunning sense of responsibility I believe. I just started abusing him!!

    I had given some money (~4L) to one of friend while he was purchasing some plot. he told me he will give it back when my marriage is arranged (perhaps he thought I will never get married 🙂 ). when it came to return it (which was only 7-8 months later) his father paid me 2 L and rest he paid me by paying bills in my marriage (GOLD) by using his credit card. So honest.

    1. thanks for sharing that Kaushik 🙂 . You are blessed to have such friends 🙂

  5. Sunil says:

    I said NO to one of my wife’s BEST friend… both my wife and her friend felt very bad about it…
    At the same time another friend of my wife helped him…

    Now he is not paying the money regularly,…. their relation is broken…

    However, our relation is still intact and we ares still best friends…

    I hope the story is self explanatory… Somehow, Friendship and Money doesn’t go togeather…

    Yes, if you can forget the money you gave go ahead… and help.

    1. Great 🙂 .. thanks for sharing that !

  6. Sumi says:

    Dear Jago Investor,

    You have taken up a burning issue which is ruining my financial life.
    My husband gave 5L to his closest friend on 2011 by getting a promish of giving it back by 2012.That money was saved to pay lumpsum instalment to the builder for our WIP home in 2014.We thought ,if he delays also we will get it by 2013.so we will not have any issue.

    But when we went to him asking to pay back,he is asking additional 3 L.So that he can put in his business.He is assuring us that if we will pay more money he will be able to get out of crisis and will be able to pay us back.

    But this time I said a blank NO.But I am very much worried how to get my money back.With out that money we might have to go for personal loan.

    Thanks

    1. Yea I know this is such a big issue which pours water on many people plan ! . You always have to think about future and its consequences .

      Manish

  7. Iman says:

    Dear Jago Investor,

    Thanks for posting this article, it raises awareness about one of the most common financial mistakes people do. I too experienced similar betrayal from two of my friends. I cannot call them friends anymore, since they are selfish people and took advantage of friendship.

    One friend took 5 lakhs from me in 2007, which I saved for my sister’s marriage. He said he would promptly pay me back when the marriage is arranged and till then he said he would pay bank interest. He did not pay the money when the marriage was fixed in 2013. He gave some excuses about his condition, I had to take personal loan. I understood that he would never pay back.

    Another friend borrowed 75 thousand and 25 thousands from me in 2006 and said he will pay back in a month. I just blindly believed and helped him. He also cheated me by not returning the money, I had made several phone calls but no use.

    Helping your friends could cost your financial life. DO NOT GIVE YOUR HARD EARNED MONEY TO FRIENDS, 99.9% IT WILL NOT COME BACK TO YOU.

    You will be left with loss of money, anger and sadness.

    Say ‘NO’ or find creative excuses to say No to avoid this situation 🙂

    Thanks
    Iman

    1. Thanks for sharing your experience Iman ! .. It would be a great learning for others .

      Manish

  8. Chetan Ambi says:

    Thanks for the wonderful article. Though I have have not lent money to any of friends/relatives I will be cautious from now on after reading this article. Sorry to hear bout Divya’s brother incident.

    1. Thanks .. Note we are only talking about casual decisions where people lend to anyone they feel is their “friend” . We are not saying dont help someone in real need 🙂

  9. Ashwin says:

    Its not only friends, even relatives who are insurance agents push us to buy policy, simply because they have no other job or need to meet their targets. My mother-in-law has paid Rs 2 lakh for some policy, and after 4 years, its worth Rs 2.14 lakh. She tried to help a relative and now she is upset.

    Money is a very touchy topic, and even siblings who might be close during childhood can become rivals after marriage, if money is involved. The following should be avoided: Being a gurantor for somebody’s loans, freely giving debit or credit card to a family member.

    Many people (friends, relatives) approach me to invest in some insurance policy, I have turned them down, and maybe relationship has soured, but once you fall into the trap, its only the insurance company and the agent who have the last laugh.

    1. Thanks for sharing that ! ..

      Really thats true … relationships turn sour due to these things ..

      Manish

  10. brundaban says:

    Dear ALL,
    I’m also a victim of this painful personal loan lending to a friend.
    In 2007 i gave a friend 10lakh as personal loan, everything went on smoothly, but after 6 months the real drama started, he didn’t pay the EMI in time so i had to pay penalty with interest, sometimes i used to pay from my salary, it was totaly difficult for me to pay the EMI as it constitutes 70% of my salary then, still i was getting frequent calls from banks to pay when i opposed he didnt pay the loan, switchh off his mobile, even told he dont know me,so i thought that i wont pay now, then stopped payment, and after going to his home many times he agreed to settle the loan, and finally settled on 2010, with a condition that i’ll pay him 2 lakh, even i did that, still i’ve not recovered the same amount from him, now if someone even ask me for 5K i think 100 times, bocz of this situation, so suggest friends dont give any personal laon to anybody!!!!

    1. Your case is really a lesson for many people .. thanks for sharing your story ! ..

  11. Joel Trinidade says:

    This tab is of tweet , G+ and share is coming in the left hand side of page , right in the middle and its very annoying.

    1. Hi Joel

      I change the mobile theme .. can you please remove your cache and then check again !

  12. Joel says:

    Dear Manish,

    Whenever someone ask me to lend money . My default answer is NO. If it is someone i cannot refuse i try to get to know why do they need the money and ask to commit on repayment . And whenever i lend , i lend only that much which would be easy for me to write off . Basically the funda is when i lend i already have written it off as a bad loan.

    1. Thats a nice psychological trick to make sure you to not regret your decision later 🙂

  13. Dharmadas says:

    Hi,

    I also have very bad experience of lending money to friends. At the end of it I found the relations were breaking and I let it go. But after losing such friends(I lost not friends but trust) my financial life was lil stable.

    Most of the time we take decision of lending money to friends and relatives because of emotional attachment and we don’t want to lose these people and we trust them a lot(more than our blood relations).

    How I have started treated these situations as
    1. lend them 10% of your capacity so that be ready to lose this money if you want to keep the relation.
    2. Ask them to pay in certain time and
    3. Involve their family members in this deal so if they ditch reach to their parents/spouse etc.
    4. If possible say NO.

    1. Good points .. I think the way you are now dealing with these situation is very rational !

  14. Harsha says:

    Hi Manish,

    This is psychology in finance. You have put it out really well.
    Especially I liked this line very much:
    ”….the friendship is already on the rocks then !….”
    I bet not many would have realized the situation or analyzed the status of friendship at that moment as is written in this article, that the relation had hit the lowest.

    I was sold a LIC policy by a friend, then – things sounded right. But I wanted to check what google might think about the policy I got into, thats how I stumbled onto jagoinvestor.com
    Immediately I tried to ‘damage control’, but damage was already done.
    That was a very very very expensive lesson to learn.

    Best Rgds,
    Harsha.

    1. Thanks for sharing your experience Harsha !

  15. divya says:

    I have the experience-its painful.
    my brother gave 7L rs to his close friend. he did not take it from his pocket-he has taken two loans, and gave. and one fine day, he committed suicide, reason- the friend ditched him. He did not bother about the money-what bothered him was the breach of trust that he had in his close to heart friend.We lost him. his wife and kids are orphaned. Never help anyone out of your way. we can make up for the money lost- but the person we lost, we can never get him back.

    1. This was really shocking .. very sorry to hear about your brother . One has to really think before asking money on the possible impact it can create over others .

  16. rohit says:

    I am very much impressed with this article , and I would suggest all readers -if they want to get more insights on this touchy topics is to read -The reachest man in babylon -its a learning which is wrapped in forms of short stories (<100pages) and very very interesting

    I also learned very much about from same and it helped me to say firm No in past , present and future also in many many personal scenraion-I will replace friends with "relatives"
    regards

    1. Thanks for sharing your views on this topic

  17. Manish says:

    Yeah i have done financial help to friends not by taking loans but giving money out of my savings.

    Currently 17.5% of my total savings is lend to friends . It was more than 25% some 6 months back and that was the time i decided to bring it below 20% and started saying ‘NO’ to my friends.

    Some are returning and some have stopped returning phone calls/emails .I categorised it as bad lending in my savinng list. my bad lending contributes to 16% of lending i made to friends.

    Some time back i had a good investment opportunity but because of my heavy lending to freinds and helping them i was not able to make the payment and lost the opportunity and that time i was angry with myself that inspite of having saving i was not able to make payment and decided I will help freinds but with in my limits.

    thanku for brining this article….It is useful…

    1. Manish

      Thanks for sharing . Its like either do something without ever regretting it , or dont do it . Now its your choice that from here , how do you want to move ahead . I personally suggest do not give a impression to others that you have lots of money !

  18. Jagan says:

    Yes, something like loan but not exactly, actually I have paid a bill for my friend to get his new phone. Where the bill was converted to EMI.
    As of now I am trying to get the money on every EMI and he is also paying to me, I think as of now I am on safe position from him and my CIBIL

    1. Actually if you are repaying on time, its good ! . but better not do these things

  19. vijay says:

    It’s a touchy subject. I did learn my lessons the hard way too! Luckily though, they weren’t as expensive or financially damaging. To help out a very dear friend I gifted him my older car and lent him ~Rs.50,000. Never got my money back in spite of innumerable requests and reminders. At the end, I had to just let it go. Lesson for a lifetime for 50G!

    1. If you are helping a dear friend, better write it off the loan on the day of giving it , else dont give 🙂

  20. Sivakumar Mohan says:

    Some years back my father helped my uncle my getting him some loan from a local lender(at very high interest) and by becoming a guarantor for his son’s educational loan. My uncle was not able to repay the loan and my father ended up paying the principle and interest. And since this incident our family relationship has become very sour. Recently my father received a letter from the bank saying his son hasn’t paid the educational loan back. We often wonder all things would have been fine if my father had just said no.

    1. Yes. One NO could have helped so much .. but anyways ,its a lesson for whole life now !

      Manish

  21. Hitesh says:

    Yes. I have helped a friend in his financial down for continuous 3 years.

    I have taken personal loan for him on my name which is still running and he does not pay EMI regularly (but I do).Because of delay in getting EMI’s from him my financial situation got worsen by months.

    Above all that i have given him money very frequently and all my plannings went on toss.

    Because of friendship i have been digged down under as i have not got full money back yet.

    Personal loan taken will end in November 2014.

    I want to apply for home loan next year i.e March 2014 and after reading this i am in very uncertain state though i maintain a cibil score of 720.

    Thanks n Regards,
    Hitesh

    1. Credexpert says:

      Dear Hitesh,

      720 is a decent credit score and since the personal loan has been availed on your name, the liability to repay is on you as far as the lending institution is concerned.

      As mentioned by you, 1 year of the loan tenure is still remaining and any past or future late payments would negatively impact your credit score. Our advice would be that you act as a guarantor to the loan or take the liability of other’s payments only after all the risks are calculated.

      After all, credit score is one of the most important tools used by lending institutions to evaluate an individual’s credit worthiness and any past mistakes can have a negative impact over your score for a brief period of time.

      Read the article published by Economic Times “Before you turn a guarantor” on http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/2012/11/26&PageLabel=45&EntityId=Ar04400&ViewMode=HTML
      to understand the risk associated with being a guarantor for a loan.

      Regards,
      Credexpert
      http://www.credexpert.in

    2. the problem is that it was a “personal loan” . You know when one takes a personal loan, its directly says something about your financial situation . I would be very cautious to give a home loan of 30-40 lacs to someone who is dependent on “personal loan” .

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