Lending Money to Friends

If you’ve ever loaned money to a friend or relative, you already know it can be a dicey situation.

Sometimes the person pays you back as agreed, but often that’s not how it works out, and the relationship suffers. Things can take a turn for the worse in situations such as the following:

• The person hasn’t paid you back yet, but just took a vacation or bought a new car.
• He or she continues to fall on hard times, and comes to request more money.
• There was an agreed-upon payment schedule, and the person has yet to make a single payment or acknowledge that payments have been missed.
• He or she makes bad financial decisions, and you feel compelled to offer advice, which your friend sees as criticism.
• You begin to have negative feelings toward your friend or loved one and feel they’ve taken advantage of your generosity.

Generally, the best advice is to not loan the money in the first place. Unfortunately, that’s not easy to do if someone you care about is in a dire situation or if there are other parties involved. It would be hard to tell your sister, for example, that you can’t help her make rent after she lost her job. It’s even harder if she has two small children.

How to lend money

When you can’t follow the conventional advice, the next best thing is to approach the loan with some forethought. Here’s what to do:

1. Talk to your partner. If you’re in a long-term relationship and sharing finances with a partner, talk to him or her about the situation. Make sure you’re both okay with helping this person out.
2. Expect to not be paid back. Even if you want the person to pay back the loan, expect that they won’t, and then only loan as much as you’re willing or able to lose. Another idea is to ask them to pay it back in another way. If your friend is a handyman, maybe he can take care of your leaky faucet and the jammed screen door. Use his usual rate and make the compensation plan fair.
3. Try to help them identify the root problem. If possible, try to talk to him or her about the situation and some long-term solutions to avoid winding up in a similar situation down the road. If your friend says she can’t manage to save money, tell her you can recommend some resources, if she’s interested.

It’s a hard thing to accept that the person may never make good on the loan, but you’ll be less angry if you accept it as a fact before loaning the money, and you’ll be less likely to loan more than you can afford to lose.