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Lending Money to Friends

6 Dos and Don’ts

Two smiling students having a cup of coffee in college canteen

When a friend is in a tight spot and asks you to lend them some money, what do you say? It can be tempting to simply say "yes" without thinking since this is someone you know and care about. However, this is not always the wisest approach.

That's not to say you should never lend money to friends—just that it is a decision you should think through first. Although your intentions are good, lending money to friends can sometimes have a negative impact on relationships if you don't approach it in the right way. With that in mind, take a look at these dos and don'ts of lending money to friends.

Do: Ask why they need the money.

A friend who is asking to borrow money should feel comfortable enough telling you why they need the money. If they are asking to borrow money to buy something frivolous or unnecessary, then lending them the money is probably not worth the risk of straining your friendship. On the other hand, if they need money for something important, like a utility bill or vet bill, it's worth considering.

Don't: Lend more than you comfortably can.

You should never sacrifice your financial well-being for someone else's. If you cannot afford to lend your friend money without putting yourself in a financial bind, don't do it. If your friend needs $5,000, but you only have $5,600 in your bank account, then sadly, you'll have to tell them you can't help or that you can only lend them a smaller amount.

Do: Agree on official terms.

Before you give your friend any money, make sure you agree on the loan term, interest rate, how much your friend will pay you back, and when payments are due. Write this down, and sign the document, perhaps even with a witness from a notary. If you just "handshake" on the terms, and your friend does not pay you back as expected, your relationship will suffer.

Don't: Tell everyone else about the loan.

If you do decide to lend money to a friend, don't tell everyone else. This could be embarrassing for your friend and could harm their other relationships. Keep the loan details between the two of you and your spouses, if applicable.

Do: Consider a gift rather than a small loan.

Sometimes, if your friend only needs a small amount of money, such as a few hundred dollars, it may be better to give them the money as a gift. Don't ask or require that they pay you back. This way, there's no chance of hard feelings if they don't make good on any loan terms you may have set. A good friend will find a way to pay you back in time, whether that's with money or by helping you out of some other bind.

Don't: Lend to someone with a history of financial irresponsibility.

Finally, make sure you consider who it is that's asking you for money. Do you know this friend to be trustworthy? Have they kept their word in the past, or are they someone who has a history of making poor financial decisions and defaulting on loans. Lending money to friends who can't borrow from the bank because they've defaulted in the past is not a smart choice.

When a friend asks to borrow money, don't give an immediate answer. Take at least a day to think through the guidelines above, and then decide the best way to proceed. There is no shame in saying "no" if you can't afford the loan or think it may damage your friendship.

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