Key Findings:

• 39% of lenders reported a deterioration in their relationships with friends or family following a loan. 
• Two-thirds lamented their decision to lend money to close ones.
• Infographic showing loan shark numbers by state.

When traditional lending options like banks and credit cards are out of reach or unappealing, especially during periods of high interest rates, people often look toward personal connections for financial support. But what happens when these friendly loans come with strict conditions?

Familiarity with the lender doesn’t always guarantee favorable terms; it’s not uncommon for personal loans to come with steep interest rates and rigid repayment conditions that can strain relationships.

BadCredit.org commissioned QuestionPro to carry out a survey of 3,000 people who have loaned money to family or friends to identify how many admit to imposing unfavorable repayment terms. The objective was to uncover the prevalence of so-called ‘loan sharking’ within these personal financial transactions — defined as lending under conditions that are decidedly unfair.

The findings of the survey were quite revealing. Over 1 in 5 (23%) benefactors who have extended financial help to someone they know acknowledge they have done so under terms that could be considered highly unreasonable. These lenders said they imposed terms that were excessively stringent, often with inflated interest rates, on their close contacts.

The survey also shed light on geographical discrepancies. Certain states, such as Arizona and Iowa, displayed a lower percentage of such lenders, with only 7% of survey respondents conceding to setting unfair terms. In stark contrast, more than half (57%) of lenders responding to the study in Rhode Island reported that they had reluctantly engaged in loan sharking practices.

Ashley Fricker, Senior Editor with BadCredit.org, elaborates that the label ‘loan shark’ may not be as far-fetched as it sounds in the context of familial lending:

“The expectation of familial loyalty might create a presumption that debts need not be repaid promptly or fully, potentially prompting lenders to establish stringent conditions as a protective measure against financial loss.”

The survey also highlighted the broader ramifications of these personal loans. Almost 1 in 4 (39%) lenders reported a deterioration in their relationships with friends or family following the loan. The absence of formal agreements seems to be a contributing factor in this behavior, with 23% of survey respondents admitting they had no official contract in place at the time of the loan, leading to 17% of borrowers attempting to renegotiate the terms post-disbursement.

The regret is palpable, with 69% of respondents lamenting their decision to lend money to close ones. Furthermore, more than half (52%) of respondents find themselves in a moral quandary when approached for loans by loved ones, reflecting the complex interplay of finances and personal relationships.

“The impact of personal loans on relationships is a nuanced issue, with our survey highlighting how financial assistance can evolve into a source of contention,” continues Fricker. “It’s not just about the money; it’s about the expectations and the lack of formal structure that accompanies loans between friends and family. As our findings suggest, the regret experienced by many lenders stems from the moral dilemmas and damaged relationships that ensue, rather than the financial transaction itself.”

BadCredit.org has provided tips for people who have both borrowed or loaned money to friends or family members:

If you have borrowed on unreasonable conditions:

1. Open Communication: Initiate a conversation with the lender to express your concerns about the terms of the loan. Be honest about your ability to repay under these conditions and the stress it’s causing you.
2. Assess the Terms: Review the loan terms together. Sometimes writing them down or seeing them in black and white can help both parties realize how unreasonable they are.
3. Consult a Mediator: If the conversation about changing loan terms becomes contentious, consider using a neutral third party to mediate the discussion.
4. Have a Written Agreement: If new terms are agreed upon, put them in writing. A formal agreement can prevent future misunderstandings and clearly outline the expectations for both parties. Free templates can be found online.
5.  Seek Legal Advice: If terms are egregiously unfair or usurious, seek legal advice to understand your rights and any potential remedies. Laws vary by location, but some terms may not be legally enforceable.
6. Prioritize Your Well-Being: Lastly, prioritize your mental and emotional health. If the loan terms are causing undue stress or straining the relationship to a breaking point, it may be worth speaking with a mental health professional.

If you have loaned money that has not been paid back, or has missed deadlines:

1. Practice Patient Communication: Reach out to the borrower in a non-confrontational manner. Open a dialogue to understand their financial situation and what may be causing the delay in repayment.
2. Take an Empathetic Approach: Show empathy for their circumstances. Sometimes a borrower’s situation may have changed unexpectedly, making it difficult for them to repay the loan as initially agreed.
3. Revise the Repayment Plan: Be willing to renegotiate the repayment terms. If the original plan is unfeasible, work together to create a more manageable repayment schedule.
4. Consider a Legal Consultation: If a significant amount of money is involved and the borrower is unresponsive, consult with a lawyer to understand your legal options for recouping your loan.
5. Set Personal Boundaries: In the future, consider setting clear personal boundaries regarding lending money. It may be necessary to decline loan requests to prevent similar situations and preserve relationships.

Survey Methodology:
For the survey, 3,000 respondents were carefully chosen from a geographically representative online panel of double opt-in members. This selection was further tailored to meet the precise criteria required for each unique survey. Throughout the survey, we designed questions to carefully screen and authenticate respondents, guaranteeing the alignment of the survey with the ideal participants.

To ensure the integrity of our data collection, we employed an array of data quality methods. Alongside conventional measures, including digital fingerprinting, bot checks, geo-verification, and speeding detection, each response underwent a thorough review by a dedicated team member to ensure quality and contextual accuracy. Our commitment extends to open-ended responses, subjecting them to scrutiny for gibberish answers and plagiarism detection.