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’d probably want to lend a helping hand as a friend, you also don’t want someone to take advantage of your goodwill by not paying you back.
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, you’ve got to make sure you’ve thought things through.
Before you start lending friends money, ask yourself these eight questions. Going through them should give you a pretty clear picture of what could happen, and give you enough information to make your final decision.
8 Questions to Ask Before You Lending Friends Money
1. Why does your friend need the money?
Sometimes, a one-time need may crop up for which a timely loan might help your friend get through a difficult circumstance.
Emergencies happen, or perhaps they want to take advantage of a business opportunity but cannot raise the necessary capital at the moment.
Whatever the case, be clear on why your friend needs money before making a decision. This can help you get an idea of 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 likely be seen as more creditworthy than one who needs a loan to go on vacation. (Depending on the business idea of course!)
2. Am I in a solid position to lend someone money?
Before you even think about lending friends money, 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 won’t 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 in a position to proceed with the loan.
However, you should not use money from your emergency fund to get a friend out of a hole.
Read this next: The 6 Essential Rules to Follow if You’re Helping Someone With Debt
3. What is their character?
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.
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. (And potentially your own financial situation.)
4. What other debts does your friend have?
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 could 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.
5. What is the expected repayment period?
Have an expected time frame when you expect 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’ll need the money in six months, you can bring the repayment deadline closer by a month or two.
This allows you to accommodate any delays in payment.
6. Are they creditworthy?
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.
- Do they have a business or steady job?
- Do they have means of raising the 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 any trace of creditworthiness from your friend, you may want to turn down their request.
7. What is their repayment plan?
Ask your friend their plans for repaying you.
Anyone serious enough to borrow money would have considered how they intend to pay back before putting in their request for a loan. If your friend does not have a set period when they would repay you, this is a red flag.
Chances are they are not considering how to repay you.
8. How will this loan impact our friendship?
Before lending friends money, consider the cost of your action or inaction to your friendship.
- If your friend doesn’t pay you back, what strain would this put on both of you?
- Would you be willing to forgo the friendship, or would you give the loan as a gift?
- What if you refuse them, would they take it kindly?
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’re less likely to feel hurt when the friend doesn’t pay you back.
Lending Friends Money: Key Takeaway
While lending friends money may be a good gesture, it doesn’t always imply that it’s the right thing to do.
If you do decide to go forward with the loan, make sure you have some kind of contract or written agreement in place that spells out 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 on lending friends 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.
