Many people sometimes run short on financial resources, whether it’s a regular problem making ends meet, an unexpected expense, or the inability to spend having simply forgotten a wallet at home. As a consequence, people might reduce their spending or try to find a solution, for example by borrowing money from a financial institution. But is this the only immediate solution to a budget shortage or unforeseen cost? Another solution might be closer than we think. Should we consider asking friends for help?
Friendships are for most people a central aspect of their personal network and social environment. They are considered to be close and natural (Wiseman 1986), being characterised by mutual liking and care (Annis 1987, Hays 1989). Friends care about the other person and the relationship with him or her. But despite this great care for each other, friends often find it difficult to discuss their finances and related challenges. Talking with friends about money can be considered taboo and has the potential to damage the social tie (McGraw and Tetlock 2005). After all, friendships do not revolve around money but serve the social needs in our life.
In a recent study, we explored the boundaries of finances in friendships (Exton and Straeter 2018). Although requesting financial help from friends feels strange to most of us, it appears that there are unexploited aspects to this informal lending market that may be fruitful.
In our research we compared people’s willingness to request from and provide financial support to close friends by borrowing or lending money for everyday purchases. We ran an experiment among 293 American adults and, as expected, we found that when someone is financially restricted (in this case, a forgotten wallet during a shopping spree), friends were much more willing to lend money to a friend than willing to ask to borrow money. Remarkably, this gap in willingness to borrow and lend widened as requests were repeated (see Figure 1).
Our findings can be explained by the social norms that govern friendships (Clark and Mills 2011, Fiske 1992). A small, short-term lending arrangement is a different experience for lenders and borrowers. Such an arrangement offers lenders the opportunity to show care for a close friend and to meet the social expectations of friendship, but this opportunity is not present for the borrower. In fact, the borrower receives the benefit of an immediate increase in funds, but this comes at the cost of placing a financial burden on the lender. Instead of looking after their friend’s best interests, they may feel uncomfortable asking for money and exploiting the relationship (Straeter 2017, Dahl et al. 2005, Adams 1965).
Previous research on taboo decisions within relationships suggests that focusing too heavily on finances within friendships, i.e. monetising the relationship, can have detrimental effects and even ruin a friendship (McGraw and Tetlock 2005). Surprisingly, however, our results indicate that the consequences are not always negative. In the case of repeated informal lending requests, people are found to be even more willing to lend money to a friend. Such increased cooperative behaviour has been described as the Ben Franklin effect (Niiya 2016, Jecker and Landy 1969) – people who have done good to you will be more ready to do you another favour. Based on research into altruism and pro-social behaviour (Leider et al. 2009), it can be reasoned that people repetitively experience a warm glow from lending to a friend, especially when that friend seems not to exploit the friendship and acts responsibly by repaying the loan on time. Our data suggest that in such situations the friendship is not monetised, and the lender feels encouraged to help his or her friend more than once.
In contrast to lenders, borrowers don’t seem to become accustomed to the borrowing process and start to feel less comfortable repeating their small loan request. As a result, borrowers’ distaste of borrowing money from a friend increases, and they become less inclined to request small informal loans. This means that the informal lending market stays sub-optimal over time, although it could offer many possibilities.
Figure 1 Friends’ willingness to borrow or willingness to lend across conditions
Notes: All conditions differ (marginally) significantly (t’s(289) > 1.856, p= .064, Cohen’s d> 0.31). Error bars represent ± 1 standard error.
Easing the informal lending market
Having identified a gap between friends’ willingness to lend and willingness to borrow, which widens over repeated requests, we question how the functionality of this sub-optimal informal market could be improved. When will friends feel less hesitant to ask for help and borrow money? The solution may rely in reducing the discomfort that borrowers likely experience when requesting money from a friend. Based on behavioural science research, we suggest two ways in which borrowers may feel less hesitant to exploit the informal lending market.
- First, the lending occasion should allow for reciprocation.
Reciprocation is a fundamental human response to receiving a favour and a main driver of our behaviour. After someone has done something good for you, you feel the need to respond to the gesture (Gouldner 1960, Regan 1971). When people are short on money and have difficulties making ends meet, it seems likely that they won’t be able to easily repay the loan or to offer their friend similar help in the near future. Being able to thank your friend and reciprocate the favour (besides the repayment of the money) might help soothe the loan agreement. A reciprocated favour can take many forms, including small gestures such as helping a friend with a tedious task (e.g. moving) or pampering him or her (e.g. preparing a home-cooked meal).
- Second, informal lending may be stimulated via clear regulations and the accessibility of technological tools to regulate the peer-to-peer loan.
The discomfort that borrowers seem to experience when they place a financial burden on the lender might decrease if the level of effort required to make the loan is reduced or the transparency of the loan process is increased. By defining the ‘rules’ of the loan and facilitating repayment by using peer-to-peer apps such as Twyp, Pingit, or Venmo, borrowers might be more inclined to ask for or accept financial help. This is in line with research showing that technological advancements increase consumer online banking (Pikkarainen et al. 2004). Thus regulating and simplifying small informal loan arrangements could stimulate the informal lending market.
Our findings provide some first insights into people’s willingness to enter into the informal lending market. Within close friendships, potential borrowers are less willing to enter into financial arrangements than potential lenders. Further exploration into this domain is needed to indicate under which conditions borrowers are more motivated to participate, and how the willingness of lenders can change. Having assessed these circumstances, a fruitful informal lending market could arise.
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