When a friend asks to borrow money, you undoubtedly feel like they've put you on the spot. Of course, you do want to help your friend out, but there's probably a reason he's turning to you rather than to the bank. You may be the most financially successful person in your group of friends, but this doesn't mean that they should treat you like an ATM. On the other hand, if you want to help your friend out, you can do so in a way that makes it more likely for you to keep your friendship and get your money back.
Amount, Timeframe and Frequency
There's certain situations where lending money to your friend is a no-brainer. When a friend says, "Hey, I don't have any cash on me. Would you mind picking up the tab tonight and I'll pay you back tomorrow?" you probably won't have a problem saying yes, especially if this doesn't happen that often. However, if he or she is asking for this favor all the time and forgetting to pay you back the next day, you might take pause.
Whether or not you want to loan a friend money often depends on the amount he or she needs, when he or she plans to pay you back and how often he's asking you for a loan. It's a lot easier to hand out $20 for drinks than it is to give out $5,000 and get it back slowly over time. Think carefully about what your friend is asking you and whether it fits with what you want.
Your Own Finances
Consider your own finances before you loan money to a friend. You naturally want to help out, but it shouldn't be to the detriment of your own budget. Saying that you need to check your accounts first can also buy you some time if you don't want to give a definite answer immediately. Remember that after you give the loan out, you should still have enough of your own money left to cover all of your expenses.
When a friend is asking for a large sum of money, think about what you were planning to use that money for and how not having it could negatively affect you. For example, if you have $3,000 in your emergency savings fund and you loan that money to a friend, what will you do when you have an emergency? When your friend pays you back a little each month, will you be disciplined enough to put the money back into your savings account or will you spend it on frivolous things?
Money or Friendship
Before you lend the money, ask yourself whether you're fine with losing either the money or the friendship. There's always a chance that your friend won't pay you back and you should think about what you'll feel if that happens. Some people will not care about losing the money and will work toward maintaining the friendship. Others will lose the friendship by either pressing the person to give the money back or feeling resentment toward the person when he doesn't pay his debts.
If you don't think you'll feel comfortable with losing either the money or the friend, it's smart to make a rule for yourself against lending money to friends. As Shakespeare said in Hamlet, "Neither a borrower nor lender be". There's truth to that statement.
Trustworthiness
As much as you love your friend, you have to consider how trustworthy he or she is with money and whether you can count on him or her to repay the debt. Every situation is different. If your friend is the type of person who fritters away money on lattes and trips to the mall every weekend, you're likely to have some bad feelings when you see he or she spending money that you feel should rightfully belong to you. On the other hand, if your friend has been unemployed and is asking to borrow money to buy clothes for the job he or she is starting next week, it's a different story.
When a bank lends money to a person, it looks at a person’s credit report and decides how likely it is that he or she will repay the loan on time. Though you might not have access to your friend’s credit report, you should still know a bit about his or her personality and whether he or she pays bills on time. You should also know whether he or she is going to take repaying you as seriously as your friend would take repaying his or her other debts. Use this assessment to determine whether you want to loan him or her money or not.
Making It Official
Once you've decided to loan the money, it's important to make things official. Loans between friends can turn sour when there are too many things left unspoken. Come up with a few terms together, such as how much the loan will be for, when and how he or she will make payments and what can happen if your friend falls behind on the loan. Write these down on paper and then both of you should sign the document in front of a notary public and have the paper notarized. If your friend isn't following through on his or her end of the deal, remind him or her that he has a legal obligation to repay you the money.
In general, it's best to avoid lending money to friends, even though you may want to help them out of a bad situation. If the person was good enough with money, he'd likely be able to get a loan through more traditional methods. That he's coming to you isn't the best sign. Still, there may be times when you're willing to go through with the loan, and you want to protect yourself as best as you can.
