When it comes to loaning money to friends, tread carefully! Dr. George Loewenstein is an economics professor at Carnegie Melon University, and he says that loaning money to friends can ruin even the oldest, closest friendships.

Dr. Loewenstein surveyed a thousand people who’d borrowed money from friends – or loaned money to them. The result: Each person remembered the loans very differently. 

  • For example, the people who borrowed money tended to underestimate how much they still owed their friend – because they hadn’t kept track of their payments. And if a loan was overdue, they were likely to say they thought the money had been a gift – not a loan.

  • But the people who loaned money to their friends had a better sense of what was really owed. So, it’s no surprise that most of them said they felt their relationship had been damaged because their friend didn’t pay them back. 

  • But get this: The borrowers who were behind on their payments didn’t believe the transaction was hurting their friendship. And most of them didn’t feel like they had to avoid the lender because they were embarrassed about non-payment. In fact, most of them weren’t concerned in the least that not paying back the loan would hurt the friendship – or that the friend may have NEEDED the money back. 

So, what’s behind the big difference in the way people see things? Scientists call it a self-serving bias. Which is basically our tendency to remember things in a way that makes us feel better about ourselves. 

Bottom line: If you loan money to a friend, get a written contract - one that spells out terms like interest rates, and repayment schedules, and if you borrow money – remember, it’s not a gift.