Other People’s Money: Borrow It Only With a Plan

Be smart about borrowing

When it comes to borrowing from friends, there are two types of loans:

1) The safe loan: You borrow money for a short time because you don’t have cash handy, but you do have the money to pay it back. If you forget your wallet and borrow $10 from your friend at the movies, and you have the $10 to repay her, that’s fine. This is a “convenience loan,” and it’s safe as long as you remember to pay it back.

2) The dangerous loan: You borrow money you can’t repay, because you want something but can’t afford it yourself.

As a Money Savvy Teen, you’ve learned there’s always a price for buying things you can’t afford. When you borrow with credit cards, that price can be super-high interest rates and even financial trouble. When you borrow from friends, the price can be even higher.

SCARY BUT TRUE

Freshman who enter college with a credit card in their name already carry an average of $1,585 in debt.

The dangers of borrowing from friends

When you borrow money that you can’t repay from your friends, the prices you pay can be high:

1) Damage to your reputation

2) Guilt—from not being able to repay the money you’ve borrowed

3) Anger—because we often turn our feelings of guilt into anger at the person we feel guilty toward

4) A wrecked friendship

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SMART MOVE

Borrow from a friend only if you have the money to pay it back right away, and always repay your friend before she has to ask.

Safe borrowing can help friendships

Believe it or not, asking a friend once in a while for a “convenience loan,” the safe type of loan we’ve just discussed, can actually strengthen your friendship. Here’s how.

1) It gives your friend a chance to do something nice for you. We want to think of ourselves as good friends, and when we get the opportunity to do a friend a favor, we feel better about ourselves and our friendship.

2) It shows you’re trustworthy. We’ve explained how paying bills on time helps you build a good credit score. The same is true with friends. If you let a friend lend you some cash, and you repay it quickly and without having to be reminded, you’ve shown you’re someone who can be trusted.

Both of these things can actually help make your friendships stronger.

SCARY BUT TRUE

More than half of college students graduate with $5,000 in credit card debt.

Making your borrowing safe

If you borrow from a friend, how do you make sure it’s the safe type, a “convenience loan,” and not the dangerous type that can hurt your friendship and reputation? First, borrow only if you can repay it quickly. Second, write down your borrowed money as a bill you owe.

If you borrow $10 from your friend Sam at the movies because you forgot your wallet, the first thing you should do is find a pen and paper (or even a napkin), and write out “Pay Sam $10.” Then keep that note where you’ll see it constantly until you’ve repaid Sam.

The key is to pay the loan back as quickly as possible, and before Sam has to remind you. That behavior is so unusual that if you do it, Sam will be surprised and impressed.

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SMART MOVE

Consider a no-lending policy.

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