These days, borrowing and lending money between friends is easier than ever. Apps like Zelle and Venmo let people send and receive money instantly alongside emojis and written messages. Even before these apps became commonplace, the practice of loaning money to a friend could go haywire. In Hamlet, Polonius warns: "Neither a borrower nor a lender be; For loan oft loses both itself and friend."

But why does combining finances with friendships sometimes lead to fallout? Thankfully, psychology and sociology have some answers.

Blurring Two Types of Relationships

People's relationships with their friends and with monetary institutions play by different rules. Psychologists have long understood that friendships typically operate as "communal relationships," which are hallmarked by not keeping itemized records or a "score" of transactions. People do not generally expect friends to render services. But in economic or market relationships, keeping a detailed score is expected. Relationships with accountants and mail carriers involve services rendered, not reciprocity. When friends lend and borrow, they blur these two distinct types of relationships together, and it's unclear as to whether strict scores should be kept or not.

Social scientists haven't carefully considered this unique, yet common situation. Plenty of research in marketing and psychology has tracked how people feel about different ways of managing their own money, but much less research has explored how people respond when someone else spends their money.

Lenders Want Oversight on How Money Is Spent

Unlike paying and gifting, lending has two stages: the loan and the repayment. Because the money is supposed to come back to them eventually, lenders might feel that the money is still theirs, even after they hand it over to the borrower. My team and I wondered whether this sense of ownership meant that lenders believe that they deserve oversight of how the borrower spends the funds. That is, do they want control over how their money is used?

We conducted six studies of how people navigate money-lending situations. These studies surveyed nearly 1,900 people about their reactions to a variety of scenarios. The first set of studies had participants in the role of lender and traced their responses to specific useful or indulgent purchases made by a friend who borrowed . Next, studied societal-scale lending relationships amongst taxpayers and small businesses and traced the expectations borrowers and lenders bring to the relationship. These scenarios allowed us to examine the motivations driving our findings.

Across these studies, we found that lending comes with unique expectations. Compared to gifting and paying, lenders have more negative reactions when borrowers use the money they receive to buy things that make them feel good as opposed to buying things that will be useful. This wasn't unique to friendships. Even when taxpayers lend money to a small business (in a bailout structure), they also approved of the loan program less if the business spent the money on a conference focused on building team morale than if they spent it on a conference focused on building the team's skills.

These preferences regarding how the borrower spends money seem to stem from lenders' beliefs that they deserve oversight of how funds are spent. This is due to lenders' and borrowers' beliefs about who has more ownership of the funds at the time of purchase. Lenders only temporarily suspend objective ownership of the funds but still feel that they own the money. In contrast, borrowers feel that the funds are theirs to use as they wish because they often have physical or digital possession of the funds at the time of their purchase.

A Crash Course on Harmonious Lending

Although our studies show how lending can go awry, we have some advice for those still brave enough to borrow or lend money. When in doubt, be clear and lay out expectations at the onset. If you lend, do not think you can remain impartial to what the borrower purchases while the money is out of your hands. If you are a borrower, be aware that your lender likely cares about how you spent the money. So, you might emphasize to them your spending on useful things, but downplay your spending for something designed to make you feel good.

For Further Reading

Angulo, A. N., Goldstein, N. J., & Norton, M. I. (2024). Friendship fallout and bailout backlash: The psychology of borrowing and lending. Journal of Consumer Psychology.

Dezső, L., & Loewenstein, G. (2012). Lenders' blind trust and borrowers' blind spots: A descriptive investigation of personal loans. Journal of Economic Psychology, 33(5), 996-1011.

Fiske, A. P. (1992). The four elementary forms of sociality: Framework for a unified theory of social relations. Psychological Review, 99(4), 689-723.

Pierce, J. L., Kostova, T., & Dirks, K. T. (2003). The state of psychological ownership: Integrating and extending a century of research. Review of General Psychology, 7(1), 84.

Ashley Angulo is an assistant professor of Marketing at the University of Oregon studying perceived ownership in the context of giving relationships.

Noah Goldstein is the Ho-Su Wu Chair in Management at the UCLA Anderson School of Management studying persuasion and social influence.

Michael Norton is the Harold M. Brierley Professor of Business Administration at the Harvard Business School. He is the author of the forthcoming book, The Ritual Effect: From Habit to Ritual, Harness the Surprising Power of Everyday Actions.