Stack of Money

7 Things to Keep in Mind When Lending Friends Money

I once had a roommate move out while owing me over $200. Sure, not a ton of money, but nothing to sneeze at, particularly when in grad school. He had left for the marines and told me a check was in the mail, but it never arrived. What a frustrating situation! I have had to loan friend and roommates money in the past, and every time it is stressful and I hate to do it. Five or ten bucks for lunch is one thing, $830 to prevent eviction was a different story.

If you are going to loan friends or family money, set the terms well ahead of time. Here are some rules and guidelines when giving a friend money that is not intended as a gift:
  1. Make sure the friend knows it is a loan and not a gift. Be very clear and make sure both you and the friend verbally acknowledge that it is a loan.
  2. If it is a substantial amount, put it in writing. Include the amount and repay deadline (or deadlines if it is going to be over time). Both of you should sign the document. You don’t need a lengthy contract, just something simple that explains the transaction and responsibilities of both parties.
  3. If you are going to charge interest, agree on how it will be compounded and the payment schedule. Microsoft Excel has a loan amortization template that can help with that.
  4. Know the risks. If your friend has a bad history with money, do not expect this time to be different. That is why I looked at credit reports when making loans at the bank. Past performance is the best indicator of future payments. While you are at it, you can get a free credit report and free credit score for yourself.
  5. Be prepared to take a loss if your friend is flaky and bad with money. Hopefully it does not come to that, but your friends are not FDIC insured.
  6. Do not loan money to people you do not trust. I trust my friend that owed me $212. He did eventually pay it back and we are still good friends. (But I didn’t loan him money again)
  7. Know that money can come between friends. I hardly talk to the friend who once owed me $830. He did eventually repay everything, but it put a big strain on our longtime friendship.

Do you have any personal loan horror stories? Have your friends every skipped out on paying you back? Share your stories in the comments.

Image by MoneyBlogNewz / flickr

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Comments

    • says

      Sometimes conversations about loans with friends and family can be awkward. To keep the relationship strong, always keep it businesslike.

    • says

      You never have to feel obligated to give money to anyone, particularly if you are working on paying off debt yourself. Even when people pressure you, always stand strong and take care of your own needs first.

  1. says

    Very important tips especially 3,4 and 6. the problems is not lending them it is getting it back when you truly need it. I recently borrowed my friends some cash but they have kept on making excuses on why they haven’t paid back.
    Just trying to a friend but for how long?

    • says

      You’re right on. No one ever has an issue when handing the money out, the problems come around when you try to collect.

  2. says

    Totally agree. However, I have decided to not loan money to friends in 2014. They have money problems for a reason. I’d rather just give/gift them money than providing a loan that they plan to pay with good intentions. I value my friendships and do not want to resent people who cannot repay their obligations to me!

    • says

      I totally get that. Sometimes people just need a little help, and expecting the payment back can put a huge strain on the relationship. Just helping them out might be able to get them back on their feet, but I’d be careful not to feed into the problem and make it worse. My help would come with coaching and a plan to get things moving in the right direction.