Although borrowing money is usually done with the best intentions, lending money to friends can leave you without your money and possibly without your relationship.
Loaning money is almost always a bad idea, but with so many people losing their jobs, homes, and savings it’s a real possibility that you may find yourself seriously considering helping a friend in financial trouble when they ask that dreaded question: “Can I borrow some money?”
Before agreeing to a loan, try opening the lines of communication to understand their situation. It may be that your friend would be better off working with a reputable budget counseling organization. And sometimes, even though it’s difficult, saying “no” is often the best thing you can do for someone.
If you are considering lending money to a friend, the experts at Consumer Credit Counseling Services, a division of Money Management International, offer the following advice.
• Don’t put yourself in a tight spot. Only loan money you can afford to lend and make sure you’re still allowing extra cash flow for yourself. List all necessary living expenses and make sure those items have been paid prior to agreeing to lend money. Ensuring that your obligations are met before making a loan will guarantee that you don’t end up in a similar situation.
• Put it in writing. If you choose to lend someone money, treat the loan like you would any other business matter. Discuss the terms of the agreement and put the details in writing. Be sure to list both parties involved, the interest rate, due dates, payment amounts, and penalty for late or missed payments. Also, be sure to keep a thorough record of all payments made.
• Know your place. Do not assume a position of power by expecting special treatment from the borrower. Also, once the money has been lent, don’t try to control how it is spent. Being too authoritative could damage your friendship.
• Prepare for the worst. Make sure you are comfortable with collecting the money owed to you. Document the date and time of any letters or phone calls sent to collect on your loan and be sure to make note of all the responses to your attempts. Your records may be necessary if you plan to take the matter to court, or if you plan to write the debt off as non-business bad debt on your next tax return.
If you still aren’t sure whether or not you should extend a loan, remember this famous quote from Shakespeare: “Neither a borrower nor a lender be; for loan oft loses both itself and friend.” Also, remember that banks charge interest rates for a reason -- lending can be a very risky business.
