5 Questions to Ask Before You Lend Money to a Friend
Most of us don’t think twice about buying a coffee or picking up the lunch tab for a friend who’s low on cash. But what about when a friend asks you for a more significant loan? Before you answer yes or no, ask yourself these questions. They can help you decide if you should lend money to a friend.
Why Do They Need It?
While you wouldn’t normally pry into a friend’s financial situation, since they asked you for the loan, it’s fair to ask why they need it. You may feel differently about offering a loan to cover an emergency expense versus providing money as a short-term solution to a long-term overspending or money management problem. If your friend gives a vague, evasive answer or refuses to answer at all, that’s a sign to decline their request.
Can I Afford It?
If you are inclined to lend money to a friend, you have to ask yourself if you can afford it. Carefully evaluate your own budget, goals, savings and employment situation to determine if you have the money available to lend and if you can live without it for the foreseeable future. If you would need to dip into savings or other assets to extend the loan, it’s best to say no.
Will They Stick to a Repayment Plan?
If you decide to lend money to a friend, it’s important you both agree to repayment terms. You’ll want to create a simple loan agreement and have both parties sign it. This takes the loan outside the realm of the personal and makes it more business-like, which should make things potentially less awkward for both of you.
What if My Friend Doesn’t Pay Me Back?
Ultimately, you’ll have to decide how you’ll respond if your friend doesn’t pay back the loan in full. If you fear it could ruin your friendship or you know you’ll hang on to feelings of anger or resentment, you’ll want to say no. Most financial experts agree that you should think of loans to friends or family as gifts, which lessens the expectations of repayment.
If I Say No, Is There Something Else I Can Do to Help?
It’s natural to want to help a friend who is struggling. If you decide not to offer the loan, see if there are other ways you can help. Perhaps you can have them over for dinner (and send them home with leftovers) once a week. If they’re job hunting, help them network, update their LinkedIn profile and offer to watch the kids while they’re interviewing. Or if they’re struggling with credit card debt, tell them about our online financial review, which provides a personalized budget and action plan to eliminate debt, all at no charge.