money management

If You Want to Lend Money to Friends…

lendfriends
Written by TK

Five tips to keep in mind if you want to lend money to friends.

Have you ever lent money to your friends?  I have done so on a couple of occasions; once I got it back and the other time I didn’t.  We recently talked about whether you would lend money to your parents and now I’m asking if you would lend money to friends.

I think lending money to anyone – family or friends – is a sensitive area.  On one hand you want to help your loved ones, but on the other hand you may be taken advantage of because friends are willing to blur the lines when it comes to repayment.

If you want to lend money to friends keep these things in mind before you do:

Don’t get into debt

If you don’t have the money to lend I would always say no.  There is no point in getting into debt for a friend.   If your friend is asking you to lend them money they probably don’t have the best credit score and have very likely been declined by a bank.

If your credit is better it doesn’t mean you have to use it.  If I had the money I may lend it friends, but I certainly wouldn’t get into debt for them.

Sign a contract

This may seem totally weird, but I can’t tell you how many times I’ve seen a case on The People’s Court where there was no proof that the money was a loan because there was no contract signed.

If your friend decides not to repay and you do want to pursue legal action you need proof that the money was not a gift and that it was supposed to be repaid.  A contract helps make sure this happens.

Set up a repayment plan

At the time you lend money to friends set up a repayment plan.  This way everyone is on the same page when it comes to the money.  Setting expectations from the get go help ensure you both know when the money should be paid back in full and if interest applies.

Talk about the consequences

The contract should also include what happens if the money isn’t repaid – either by the monthly due date or in full at the end of the term.  This can include additional financial penalties or an extension if necessary.  It’s important to have firm dates in place that aren’t contingent on any variables.

A repayment promise like “I’ll pay you back with my tax return” is no good because what happens if your friend doesn’t get a refund come tax time.  This is why setting expectations and a repayment plan along with having a signed contract are so important.

Be ready to ruin your friendship

This actually happened to me with the friend who didn’t pay back the money I lent her.  I felt so betrayed that I couldn’t stand to spend any more time with her.  It was a little bit about the money, but it was mostly about being taken advantage of and having my trust betrayed by someone who was supposed to be my friend.  That was  deal breaker for me.

I’m not saying every monetary transaction has to end this dramatically, but you need to be prepared that it’s a possibility.

About the author

TK

2 Comments

  • You know, I think you can actually avoid that last step by how you think of the loan. If you agree to loan money to your friend, then in your head you have to think of it as a gift that you’re not getting back. Period. Then, if you go through all the other steps and you get it back, great, but if you don’t, you will have already written the money off and you’re no worse for it. You have to be able to do that, and if you can’t you probably should just say no instead.

  • I appreciate you post about lending to friends and relatives…. its good opportunity to acquaint a person with reality, in that there are legalities and formalities in life, and that those can apply just as much between friends as they can between business associates and strangers. And yes, I think it is definitely important to think about your conditions and contingency plans, and to follow through with them.

    Another thing to consider is, if you can afford it, gifting a person money, or least a portion or what he or she is asking, instead of lending it. The advantages of gifting, as I see them, are that you’re coming from a position of strength, and also that gifting can be a subtle statement of mistrust of your part. Too certain kind of lendee, it says: “although I value you a a friend, because of your maturity issues I’m not sure I will get this back, so you can have it instead.” As a result of this, the person ends doing some good self-assessment. contemlation!

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