Money has been the root cause of many conflicts.
It has soured romantic relationships, pitted partners against each other, turned family members against one another. So when a friend asks you to lend them some money, you could find yourself in a dicey situation.
Though you would want to lend a helping hand as a friend, you also do not want someone to take advantage of your goodwill by not repaying you your money.
So how do you ensure that your friendship is not compromised while not putting yourself at risk financially?
If you're going to give your friend a loan, make sure you've thought things through. Asking yourself the questions below will enable you to have a clear picture of the opportunity cost of such action, and enable you to reach a reasonable conclusion.
Sometimes, a one-time need may crop up for which a timely loan might help your friend get through a difficult circumstance.
Emergencies could happen, or perhaps they want to exploit a business opportunity but cannot raise the necessary capital at the moment.
Whatever the case, be clear to ascertain why your friend needs money before making a decision. This will enable you to know how financially responsible your friend is, and evaluate the possibility of getting your money back if you decide to give them the loan.
A friend who needs money to start a new business would be seen as more creditworthy than one who needs a loan to go on vacation.
Before you even think about lending money to a friend, your first consideration should be if you can afford to do so.
You'll want to be sure that parting with your hard-earned money until the repayment period would not affect your finances negatively.
Examine the balance of your savings account. If you have a substantial emergency reserve — enough money to cover three to six months' worth of living expenses — and still have money to hand out, you may be able to proceed with the loan.
However, you should not use money from your emergency fund to get a friend out of a hole.
The borrower's character plays a huge part in finance.
Even institutional lenders tend to evaluate the borrower's risk based on character (credit history). So why not do the same? If the friend who needs the loan has questionable character when it comes to money or a history of financial difficulties, you may want to turn down their request for a loan.
Old habits die hard and expecting your friend to change their spots because you lent them money is foolhardy. The last thing you want to do is place yourself in a fix where your loan ends up being an unintentional gift, thereby ruining a friendship.
Try to find out if your friend has other pending debts.
Chances are they may have exhausted other avenues of raising cash or obtaining a loan (such as credit cards, student loans, etc.) before they approach you. The sour point of this is when it gets to repaying the loan, you would be last in line to receive yours as they would have to settle institutional lenders first.
This only lengthens the time for you to be paid back.
Have an expected time frame when you would like to have the money back.
While you have to set a reasonable time for your period, also try to balance it with your financial needs. If you know you would need the money in 6 months, you can bring the repayment deadline by a month or two. This allows you to accommodate any delays in payment.
Being creditworthy implies the ability to pay back debt.
To do this, your friend needs to have a steady source of income. Anything short of this, then you may be taking a big gamble when you lend them money.
It may be the case that a friend of yours is experiencing temporary hardship and needs some money to get back on their feet. But if you don't see a modicum of creditworthiness from your friend, you may want to turn down their request.
Ask your friend their plans for repaying you.
Anyone serious enough to borrow money would have considered how they intend to pay back before tendering their request for a loan. If your friend does not have a stipulated period when they would repay you, this is a red flag. Chances are they are not considering how to repay you.
Consider the cost of your action or inaction to your friendship.
The crux of the matter is that you need your money back, but not at the expense of a friendship. One way to go about this is by lending only what you can forgo. This way, you would not feel hurt when the friend does not repay you.
While lending money to a friend may be a good gesture, it does not always imply that it is the proper thing to do.
If you do decide to go forward with the loan, make sure you have a paper that spells all the terms. Even if it's a sloppy payback plan or date, it should be included. You'll be able to set clear expectations, which will make things simpler for both you and your friend in need.
Finally, if you decide to loan them money, only lend what you can afford to lose.
Editor's note: This article was originally published Dec 24, 2021 and has been updated to improve reader experience.
November 30, 2023
November 29, 2023
November 27, 2023