Should I lend money to my friends?

A test of friendship

Many people find that once they lend their money to their friends, the friendship becomes a bit tense and different. Of course it all depends on the amount of money that is being borrowed. There is a big difference between a few bucks and a few hundred...or a few thousand. What if your friend doesn't pay you back? Will your friendship continue or will it be irrevocably broken? Does that mean money was more important to you than the friendship itself? Once the money is not paid back the seed of distrust starts to grow between friends.

Take time to think it over

When your friend asks you for money, simply say something like "I might be able to do that. Let me think it over." Later, go over your own finances and see if you have extra money to lend out. If the amount of money you are asked to lend will put a strain on your bank account or your savings, don't do it! If the amount is just a few bucks and you won't lose sleep over it if your friend doesn't pay you back, then go ahead and lend it.

If you don't have the money or don't want to mix money and friendship, a tactful way to decline is to offer help in a different way. Avoid the drama and get away from this situation without hurting your friend's feelings or compromising your friendship by politely telling them you can't lend the money now. Instead offer to help them find great coupons or sales, or to help them balance their budget.

Make suggestions

Suggest to your friend that he open up a high yield savings account and help him create a budget to start saving. Help him search for the best banks with the highest savings rates. Offer to help her go through her finances (as much as she wants to share) and give her tips on ways to cut down expense and spending on flexible items like groceries, clothes or vacations.

A fresh pair of eyes can help your friend find out where his money is going. Is it going into bank overdraft and ATM fees? Is his credit card spending out of hand? Is she overspending on gifts or designer clothing? This is a sensitive issue, so your friend might not be willing to let you in on his or her personal finances. But a kind offer to help your friend figure out a solution to his or her money troubles could be a great way to keep your friendship going strong.

How well do you know your friend?

Consider whether your friend has good credit, a steady source of income and a good network of family and friends. You'll need to think about this as a business transaction, because if your friend decides not to pay, you will be hurt financially. The ugly truth is that friendships have been broken over money issues, ending even in lawsuits and court hearings, so the more proactive you are the better.

If you completely trust your friend and decide to lend money to him or her, there are certain common-sense precautions you should take, especially if the amount of the loan is large enough to affect your budget.

  • Get everything in writing: Write down the amount you will lend, date of agreement, payment schedule, interest to be paid back, due date and names of the parties involved.

  • Make sure all documents are notarized. Both of you should sign in the presence of a notary. Having a signed written agreement may not guarantee you will be repaid, but it will give you the necessary backup to your claim if you ever need to take action in court.

What do you think? Would you lend your friend money? Under what circumstances?

This Guide to Money answer includes the topics: Live, Support.

Ana Gonzalez Ribeiro, MBA is a Personal Finance / Business Writer based in NYC.

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