Should You Lend a Friend Money?

The simple answer to someone that asks you for money is: no.  If you are a particularly polite person, then the answer should be: “I’ll help you find a bank that can help you out”.  Most of us are optimists so we want to give the benefit of the doubt to our friend, especially since our heart is breaking for their situation, so this article should help guide you in your difficult situation. 

Acceptable Times to Lend a Friend Money

There are some occasions when you should lend money to a friend.  These are: if it’s a life threatening situation, if you are certain they will pay you back, or if you are investing in something. 

However, if you decide to let your friend borrow some cash, there are a few rules you should abide by.

Rules Of Lending Money to a friend

First, despite how selfless you are, your needs should come first.  If you are letting him or her use your hard earned cash, then you have the right to know why he or she needs it.   Did they make a bad decision or a series of poor choices that led them into financial stress?  Are they irresponsible and careless with cash?  You may pretty much kiss the cash goodbye if they are.

Everyone has the capacity to earn a living on their own.  Unless they have an obvious excuse such as they are sick or disabled, or have recently been laid off or faced some other such tragedy, the reason they are most likely in debt is because they overextended themselves and did not live within their means.  It’s tough to sit and watch your friend suffer, but if you loan money, you could be feeding into their irresponsibility.

The Hard Truth

Only loan money that you can afford to lose.  I’m serious.  If you can look at the loan as an expense or a gift, then by all means give it to your friend.  When it comes to getting paid back, are you able to confront them for money?  Even if they promise their family they will pay you back, the future is unpredictable – he or she may find themselves in another difficult situation.

You need to sit down and think if throwing away that money is worth more than your friendship, and know that you are doing them a huge favor.  Most likely you aren’t charging interest or making an airtight contract with collateral.  If you need the money back, what steps are you willing to take to make sure they pay?

How to Protect Yourself

Even just asking someone to sign a contract can be offensive because it can seem like you don’t trust them.  However, the opposite should be true – they should want to make you feel secure, and to feel secure themselves that you won’t be pounding on their door in 2 weeks asking for all the money back.  An unwillingness to sign shows they are not certain they can pay you back. 

Ideally, you should keep collateral so if he or she can’t pay you back, you can recoup your loss.  For instance, if they want to borrow $500 from you, they should give you their computer or other item that is worth $1,000.  If they can’t pay you back, you can sell the item. They are getting something from you, so why not keep something of theirs?  This will incentivize them to make payments and will guarantee you some form of financial security.

Whether or not you decide to loan money to a friend, remember that lending or borrowing money can drastically change or even destroy the best of friendships.  It’s much better to give it as a gift and kiss the money goodbye if you can afford it.  Otherwise, saying no is the safest approach.