With Personal Loans, Lenders Have “Blind Trust” and Borrowers Have “Blind Spots”

New research shows that people who borrow money often have a “self-serving bias” and recall having paid back a larger proportion of the loan than they actually have. If you lend money to a friend, you should be prepared to have to walk out of your life.

New research shows that people who borrow money often have a “self-serving bias” and recall having paid back a larger proportion of the loan than they actually have. If you lend money to a friend, you should be prepared to have to walk out of your life.

Image courtesy of Flickr user EricGjerde.

New research shows what many people can guess intuitively: Lending money can cause negative effects on the relationships between people who borrow and people who lend.

According to an article in the Boston Globe, researchers say that their investigation into the impact of personal loans on people’s feelings “is the first to academically study the consequences of personal loans between friends, co-workers, siblings, and cousins.”

The researchers are George Loewenstein, a professor of economics and psychology at Carnegie Mellon University, and Linda Dezsö, from the University of Vienna’s department of applied psychology. Their study is in the new issue of the Journal of Economic Psychology.

An abstract of the work, which is based on a survey of 971 Americans, summarizes it this way:

Beyond the objective characteristics of the loans (e.g., whether interest was charged), and the purpose of the loan, we tested – and found support for – two main predictions: (1) at recall and evaluation of loans would be subject to a self-serving bias such that borrowers would, for example, recall having paid back a larger proportion of the loan, and (2) that loans, and particularly those not paid off by the agreed upon date, would have pernicious effects on the personal relationship between lender and borrower.

Furthermore, we found that borrowers have a blind spot when it comes to recognizing the negative feelings and perceptions evoked in lenders by delinquent loan repayment.

The abstract also notes that defaulted loans are more frequently reported by lenders than by borrowers, and that defaulted loans are a major source of bad feelings between the two parties.

According to the Globe, “Borrowers are optimistic about their ability to pay, with 87 percent thinking they will eventually make good. But only 35 percent of lenders think they will see their money again.”

The Globe also says that “Loewenstein and Dezsö don’t want their study to be used to eliminate lending. Rather, they hope their findings are used to help people avoid the pitfalls. They advise the following: 1) Don’t succumb to pressure to make an immediate loan. Think about the consequences. 2) Get a contract. 3) Document payments with receipts. 4) And most importantly, don’t lend money you have to have back.”