Should I Lend Money to Friends?

Written by Preet Banerjee

Tuesday, August 21st, 2018

Some people suggest that the best way to rid yourself of an annoying person in your life is to lend them money. If they can’t pay you back, you might never hear from them again.

Lending money to friends and family can be a touchy subject. If someone asks you for money and you say no, you could really offend them. They may be angered that you didn’t think they could pay back the money. Of course, if banks — which are in the business of lending money — think the person in question can’t pay back the money, then maybe it’s true. (Presumably they went to a bank first.)

So if you say no, you lose because it can create a conflict. But if you say yes, you might not see your money again. There are lots of downsides to consider. Of course, we tend to take these situations on a case by case basis, and there are some situations that warrant helping out our loved ones in need. But here are some tips to consider.

Decide what your policy is about loaning money to friends and family before you’re faced with being asked. In some cases, you might consider small loans of $10 to $100 as gifts instead. That relieves a lot of pressure going forward, assuming you can afford to part with the cash forever. And if you have debt of your own — particularly high-interest debt — you might decide that larger loans to anyone else are simply off the table until you pay off your own debt.

How formal do you want to make the arrangements? For large sums of money, it’s perfectly acceptable to ask for a written agreement, perhaps witnessed by a third party. Even a handwritten letter explaining the terms of the loan would be better than leaving anything ambiguous. For example, when is the money supposed to be paid back? Will it come as one lump sum, or in instalments? What happens if it’s late? Committing to these terms in writing, formal or otherwise, can help make sure everyone is on the same page in terms of expectations.

Mixing business with pleasure can be messy, which is why so many people recommend avoiding it. In reality, however, there are situations where we want to help out people we love. Making the arrangement as formal as you can is no guarantee against the loan defaulting, but it’s a lot better than handing over money with no questions asked.

 

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