Photo by Sharon Mccutcheon by Unsplash
Depending on the amount, lending money to a friend can ruin an otherwise wonderful relationship. This is why financial experts often advise against lending money to friends and family. But, what if your friend is in a tight spot and you’re the only person who can help them? Before you make this difficult decision, ask yourself the following five questions.
1. What’s the money for?
Find out why the person needs the loan. Maybe your friend was in an accident and needs to fix their car, or they need to cover expenses while waiting for a paycheck. However, if your friend is a serial borrower, you may need to set some boundaries until they learn to manage their finances better.
For instance, they might have difficulty meeting financial obligations due to a shopping addiction. Maybe they keep lending money to family members who won’t pay them back. If that’s the case, then you should steer them towards low interest money loans instead, and recommend a reliable financial services provider.
Remember, it’s not your job to swoop in like a superhero and save your friend. You also don’t want to enable irresponsible behavior or fund their bad habits. So, make sure you understand the intention behind the request before you commit.
2. Can I afford it?
Can you afford to part with money you might not get back? The only time you should loan money to a friend is if you have surplus funds or extra income. This doesn’t include your savings, and you definitely shouldn’t skip paying one of your bills to loan money to someone.
3. Could I use this money for something else?
Even if you can afford to loan money to a friend, it doesn’t mean you necessarily should. Once you’ve fulfilled your financial obligations, you may want to use that extra cash to spoil yourself. You might even use it to invest in a business idea or put it into a high-interest savings account. At the end of the day, you have your own financial priorities. That’s why you should consider the true best use for your money before you loan it to someone else.
4. How will this affect the friendship?
Lending money to a friend instantly transforms the relationship because you’re now engaging in a business transaction. Things could turn sour if the friend struggles to pay you back or ignores your reminders. You might even feel insecure about asking for your money back.
You might find yourself harboring feelings of resentment if your friend fails to pay you back as promised. Your friend might share the same sentiments when you ask for your money back. Ultimately, money is a difficult subject, and when you add years of friendship to the equation, things can get complicated fast.
5. Should I charge interest?
It might seem mean or unnecessary to charge interest when lending money to a friend. But loaning money to anyone means that you won’t have access to those funds for some time.
Charging interest is a way to recover the cost of not being able to use the money until your friend pays you back. It might also motivate them to pay you back faster to avoid accumulating too much interest.
If you decide to go ahead with the loan, engage with full transparency. Manage each party’s expectations to avoid misunderstandings. This means getting clear on the amount, the payback date, and other seemingly “mundane” details that might turn into larger issues if left unaddressed. Set unambiguous repayment terms and ensure communication remains open, even if your friend struggles to meet the original conditions.