Relationships

Is lending money to a friend ever a good idea?

By: Vin Heney on May 24, 2019

A friend in need is a friend indeed. But when what that friend needs is money, things can get messy.

Are you in a position to offer financial support? Have the terms of repayment been made clear? Should you be concerned about what the money will be used for? What about charging interest? If you don’t get paid back, should you just let it go?

The friend-lending waters are murky, at best. If things go wrong, they can go really wrong. So before you take on the role of loyal lender, let’s let a few personal finance experts weigh in on the matter.

Lending versus giving

Before lending a friend money, you should first ask yourself if you’re in a position to lend. If the loss of even a small loan would put you in a tight spot, offering money might not be the wisest of moves.

If, however, you are in a position to lend money, it might be worth asking yourself if you’re in a position to give money instead.

“When you lend money to a friend or family member, it comes with strings attached,” says Octavia Ramirez, founder and CEO of Paper & Coin, a fee-only financial coaching service for millennials. “If you have a friend or family member who’s in a tough place, and if you have the ability to help them, then I say by all means. But don’t consider it a loan of any kind. Consider it a gift. That way it frees you up mentally to say: ‘Great, I helped somebody that I love and care about, but I don’t expect to get this back.’ Not only does that maintain the integrity of your relationship — because there’s no strings attached, there’s no expectations involved — it also frees the other person of the burden to pay you back.”

Financial support — sans money

If you’re not in a position to offer money — or you’re not comfortable doing so — it’s okay to say so. Honest communication is key, especially when it comes to money. But remember that lending or giving money isn’t the only way to provide financial help. Perhaps you could offer free babysitting, or you could host a weekend meal prep session to help your friend save on food costs during the week. Be creative — there are lots of ways to offer financial support that don’t involve money exchanging hands.

“Lending your time is one of the best ways to offer support,” says Ramirez. “And in my opinion, time is more valuable than money. If I’m giving someone my time, that means more to me than giving my money.”

You’ve decided to lend — now what?

So you’ve looked in the money mirror and decided to lend some loot. Does this mean you’re now entitled to know what the money will be used for? Or is your friend’s financial situation none of your business?

“If you don’t expect to be paid back, it wouldn’t matter,” says Joe Barbieri, a fee-only financial planner at Joe The Investor. “If you do expect to be paid back …  it might be your business then.”

You’re not alone if you feel like it’s automatically your right to know.

“If we’re going to exchange money, now it is my business,” says Ramirez. “Whether I’m lending it to you or I give it to you as a gift, I’m going to of course ask what it’s for. The second you ask me for my hard-earned money, you’ve now invited me into the conversation ... If you want to keep tight-lipped, well I can keep my purse strings tight, too. It’s not about wielding power; it’s about transparency.”

As for the technical details of a friendly loan, both Ramirez and Barbieri agree that charging interest probably isn’t necessary, especially for relatively small loans, and given that the borrower is in a pinch. However, documenting the details of the loan — the amount borrowed, payback date, etc. — is advisable, even if it’s not legally binding.

“Communication is very important,” says Barbieri. “I would write it down somewhere, because people forget, have other ideas, and lose track. So definitely write it down and make sure all the parties see it.”

What happens if you don’t get paid back?

The terms are agreed upon, the money is handed over, the payback deadline comes … and goes. Your friend has put you in an uncomfortable spot. Nobody likes having to repeatedly follow up.

Unfortunately, without a legally binding contract, you aren’t left with much recourse.

“With a traditional lender, they make sure you can pay them back,” says Barbieri. “And if you don’t pay them back, they take something as collateral. With a friend, it’s not like this. You don’t have any collateral, you don’t have a legal contract, and you also have a personal relationship with them. So if they don’t pay them back, what do you do? You could let it go and treat it like a charity. If you do want to be paid back, the question becomes ‘do I trust them?’ — because you can’t force them to pay you.”

On the flip side, lending money to a friend could work out well for everyone.

“I’ve heard stories of people that have helped friends out, and it turned out to be a revolutionary thing,” says Barbieri. “Their lives turn around, they become successful. It was just what they needed at that moment. They needed somebody to lend something to get started and nobody else was there — and you were there as the friend, and it created a very good relationship.”

Whether or not to lend money to a friend is a tough call. If you can afford to help out, you might be wise to treat the support as a gift, and eliminate the risk of damaging the friendship. On the other hand, if you trust your friend to pay you back, a loan might be just the boost they need. And if the worst-case scenario does play out — your loan agreement is breached and you never see the cash again — it might actually be for the best.

If finding a good friend is priceless — losing a bad one may be money well spent.

 

Comments