5 Things To Think About When Lending Money To Friends

Despite the age-old wisdom of never lending money to friends, there will always be instances where you feel your need to ignore wisdom. Friends are after all, much more valuable than monetary value. You can’t really put a price on friendship.

The complicated thing with human emotions is that it often causes us to do things that are illogical. Even when you feel that there is a 50/50 chance that you would get your money back, you might still feel a compelling justified reason to lend.

Let’s not make peer lending all the more agonizing. So when you are ready to pull out your wallet for someone you know, at least be smart and go over these ideas before stepping into the unknown.

Are there other options?

To first identify other ways to help your friend, you have to determine what exactly is the problem in the first place. Very often people run into problems which they feel can only be solved with money. But upon digging deeper, you can often find that something non-monetary can resolve it. In extreme cases, money might not even change anything.

Maybe there are other ways to get that money. Maybe your friend needs to money as his auto insurance renewal is coming up. But maybe you can put some sense into him by convincing him that selling his car is an option. Some people are just blind to things. That’s why friends are there to offer advice.

Don’t lend more than you can afford

It could power up your ego to feel that you have done good in helping out a friend in financial trouble. The key here is that you shouldn’t put yourself into trouble instead.

If you can’t really afford to loan that much money due to your own financial liabilities, only loan an amount that you are comfortable with. Transferring financial stress to yourself will not make you feel better about yourself. Your wife will help you realize that when she learns about it.

There are a lot of people who actually run into these issues. Doesn’t it feel a little ironic if your loan is used to pay of gambling debts, and you have to suffer the consequences of it by having debt collectors on your back?

Agree on a repayment schedule

You might never see your money again. But that does not mean that you need to write it off as a bad debt as soon as you write that check. That will be a very bad way to pamper your friend.

You want to help your friend out and also get your money back. That is the ideal scenario.

So draw up and agree on a repayment schedule. This at least puts a little pressure on a friend to repay the loan. In cases where you won’t get your money back, there is still a good chance that the borrower would at least meet the initial few payments before defaulting on you. This way, you get to see a little money returned.

Be careful not to push your friend too hard for repayment, or you might lose a friend. Losing a friend is what you wanted to avoid in the first place when you decided to give out the loan.

Put it in writing

Especially in friendly agreements, scenarios with “you said I said” elements often come up. It could be a ploy, or it could be a real forgetfulness on the part of a particular party. Whatever the reasons, you want to avoid such situations as much as possible.

The simplest way to avoid them is to put everything down in writing and have all parties sign it. This endorsement is not something you are going to enforce in court. Surely, you are not taking a childhood friend to court are you?

This is just a way to prevent misunderstandings in future which could lead to a breakdown to a valuable friendship. You can laugh over it in time when the loan is repaid.

Who knows? Some people just respond better to things that are concrete and put into writing.

Don’t shut your friend off

The worst thing that could happen is to make the situation awkward by stopping all communications with a friend. Just go about as you usually would. Go on those social gathering like normal. And call him as you would under normal circumstances.

Shutting him off can make him feel like an outcast, causing him to do the same to you. Keep the communication channels open or you could lose both your money and your friend.

Be mindful that the borrower might be low on self-esteem. Anymore negative impacts on where he sees himself in the social group can be disastrous.

Why not offer the money as a gift?

If you are rich or you can really afford it, why not consider giving away that money as a gift?

This puts little stress on your relationship and also less stress on your friend. Your generosity alone could be a huge motivation factor for the borrower to return the money. Who would want to let down a benefactor?

And who knows. Maybe you could need a similar favor in future.