Financial advisors don’t recommend lending money to friends, as it can complicate or damage relationships. However, your friend might be in a difficult financial situation and is counting on you to loan them some cash. Before you agree to do this, there are several things you need to consider first.
Here are the Do’s and Don’ts when lending money to your friends:
1. Don’t Lend money to someone who doesn’t have an income
Before agreeing to lend money out, you need not assume that your friend will pay you back simply because they are your friend. Find out whether they have an income, how much they earn, and if they can repay all your money on time.
Simply put, do not lend your money to your friends if they do not have the means to pay you back.
2. Do have a backup plan
When you lend money to your friend, you need to have a backup plan, just in case, they fail to pay you back. If you had budgeted the money for something else in the future, ensure that you can still afford it even if your friend will not have paid you back when the time comes.
Alternatively, you can ask your friend to provide collateral. Ask for something of value in return, such as their car, electronics, furniture, etc. This way, if they fail to repay the loan, you use the collateral to recoup your losses.
3. Do set clear terms
When lending money to your friend, be as clear and straightforward as possible. Don’t leave out any details about your loan. Let your friend know the amount you are willing to lend, the interest rate you expect (if any), and when you expect to be repaid.
If you don’t set clear terms, your friend may think they can take as long as they want to repay the loan or that they don’t need to repay it at all.
4. Do have a written agreement
If you’re lending a significant amount of money, you might want to consider having a written agreement. This will help protect you in the event that your friend does not repay the loan. It will also provide a clear understanding of the terms of the loan, such as the interest rate, repayment schedule, and any collateral that is being used to secure the loan.
5. Don’t expect to Be repaid right away
When lending money to a friend, don’t expect it to be paid back right away. Your friend may need some time to get the money. So you need to be more patient, even when the repayment period lapses.
6. Do be prepared to lose the money
Unfortunately, there’s always a chance that the person you lend money to will not repay it. Be prepared for this possibility and don’t lend more money than you can afford to lose.
These are just a few tips to keep in mind when lending money to your friend. By following these tips, you can help make the process easier and less stressful for both of you.
