Never lend money to friends unless you can handle never seeing it again, says just about everyone. But let’s face it, if you were that rich you would just give the cash away anyway. Does that mean you have to leave your friends to starve on the streets just because you’re not running a charity?
Bearing in mind that we run a personal finance blog, we would advise you to proceed with caution no matter how nicely your friend asks. But if you really want to help out, here are some things you should do not only to ensure you don’t lose money but also to discourage your friend from having a voodoo doll made of you when you try to get it back.
Determine how much you can afford to lose
Unless your friend is borrowing 20 cents so he has enough for an iced milo, you’re probably not in the position where you wouldn’t give losing the money a second thought. There’s a difference between being able to afford the money and being fine with losing it. I can well afford to lose $1,000, but would I be pissed if someone borrowed that amount and never returned it? Hell yeah.
Ultimately, how much you decide to lend your friend depends on a lot of factors, such as how close the person is to you and what they need the money for. You would be more likely to loan money to your best friend than to some guy you met at a bar two nights ago. Likewise, if your friend needed to have an emergency medical procedure, you would probably be more inclined to lend him money than if he needed cash to zhng his car.
Whatever your threshold, you don’t want to be in a situation where you yourself have to borrow money in an emergency because that jerk didn’t pay you back when he was supposed to. So work out your absolute bottom line—the amount of money you can afford to lend without getting into trouble yourself should something unfortunate happen—and make sure you don’t lend more than that amount.
Work out a clear payment schedule
Let’s face it, the hardest part about lending money to friends is trying to get it back. There’s a lot of awkwardness involved in asking for your money back, and even if they can well afford to lend money to friends, many people who have been burnt before choose not to do so because of the pain involved in figuring out when it’s appropriate to get your cash back or trying to contact a friend who’s absconded.
It’s a lot easier if you set out a clear payment schedule. Whether that means commencing installments in 6 months’ time or paying back a lump sum in 3, put everything down in black and white, sending it to your friend via email if necessary so it can’t be conveniently lost. If possible, specify the mode of repayment as well, through a bank transfer or cash, for instance.
Once you’re worked out a payment schedule, shut up about it until payment is due. Constantly reminding your friend that he owes you money before it’s due is a surefire way to ruin the relationship.
Draw up a contract
If the amount you’re lending is a large sum, you’re better off drawing up a contract to be signed by both of you. It might be a little off-putting to have to mention it, but if your recipient is really that desperate for the money he’ll have no choice but to agree.
While you can certainly draft and sign a contract without the help of a lawyer, if we’re talking about tens of thousands of dollars, a complicated repayment schedule, interest or collateral, you’ll probably want to get a lawyer to write the contract for you. Unless you have a truly mind-boggling arrangement, such contracts should be fairly inexpensive, and you can get your friend to agree to foot the lawyer’s bill. It’s worth communicating that the contract is really in the interests (in part at least) of preserving the friendship and making sure that there are no misunderstandings, especially when dealing with such a huge amount.
It’s probably fitting to note that in cases where you loan a large amount of money to a friend or family member, it’s actually legal to ask for interest or collateral. If your friend is going to be sitting on your money for a long period of time, it would probably be appropriate to ask for interest, since inflation will eat away at the money you could otherwise have invested. Just don’t go around offering to lend money to the public or else you might end up with a conviction for loansharking.
Have you ever had a bad experience lending money to a friend or family member? Let us know in the comments!