Lending Money To Friends: Is It Worth It? And How Can You Ensure You Get The Money Back?

Lending Money To Friends: There comes a time when a friend comes to you for a loan.

Are you willing to offer the friend the loan? If so, how are planning to go about? Is lending to a friend risky? Can friends pay back as soon as you’ll need the money?

These are kinds of questions that dominate this debate. The many queries tend to leave most people in a quandary where we don’t know what to do. The decision on whether to give out loan to a friend might be tricky. And so you should always tread carefully about this situation.

Is the whole lending to a friend a great idea?

Well, that’s a trick question, I suppose. But it all depends on a number of aspects. Is the friend reliable enough to pay back the money on time, leave alone paying it back at all? This is the very first thing to put into consideration when a friend asks for a loan.

You shouldn’t even think twice about it if the friend is known to default his/her debts.

When a friend comes to you for a loan, there are many reasons for it. The friend might looking to avoid paying interest charges to a bank. Or it might be that the friend needs an emergency cash to pay for a late utility bill. Or it might be that the friend simply needs a small, short-loan to buy something.

Whichever the reason, you’ll need to consider your priorities and always put your financial wellbeing first. Remember that it’s your money that’s on the line. To guarantee your money isn’t lost, you’ll need to protect yourself by doing the following things.

Lending Money To Friends

Ask yourself and your friend, the following questions:

Can you afford it?

You need to ask yourself if you can really afford the loan that the friend is asking for. That is, can you part with the money? To what extent is it gonna affect your financial situation? Don’t overstretch your bank account.

If you decide to loan your friend, limit to an amount that won’t be a problem for you to recover in case things don’t go as you would have expected. Moreover, if you are saving some money to buy a house or working towards a certain financial goal, say to clear a debt, then you better lend a small loan or not at all.

For what reason is the loan?

You need to find out why your friend needs the loan. If the money is for an emergency, for instance, to pay for a replacement boiler or for a car repair, then it’s obvious you’ll feel more inclined to lend the money.

On the other hand, if the loan is for a less important reason, like booking a cruise, then giving out the money will be a bad idea.

Therefore, it’s vital to ask your friend what the loan is for. He or she shouldn’t be reluctant to give you the answer. And if he/she doesn’t want you to know, you better turn down the loan proposal. It’s your right to know what the loan is meant for – it’s your money after all.

Do you trust your friend?

Loyalty and trust are two main aspects that define a friendship. But this is not enough when it comes to money. You need guarantee that you’ll get back the money. You only need to give money to a friend who’ll never go “missing in action” when you need the money back.

Consider the following before lending anyone money:

  • Is your friend working?
  • How much is the friend earning?
  • Does he/she have any other financial commitments?
  • How is he/she with loans? And how effectively has he/she paid back loans in the past

By any chance the friend doesn’t have any money coming his or her way, and is probably struggling with utility bills, then another loan won’t be of any help to your friend. If the friend hasn’t paid back money to other lenders, then you better be cautious.

Should you charge an interest rate?

It is highly advisable to give your friend a loan with an interest, even if the interest is small. Although this might seem like going against the “rules of friendship” but it’s the only way to protect your risks.

This might sound harsh, but if you don’t charge an interest rate, it means you’ll only be paying for the privilege of lending your own money. Basically, it’s advisable to charge an amount that you would have otherwise earned if the money remained in a bank.

Alternatively, if you feel like not offering your friend a loan without an interest charge, then you better make sure that you truly trust him/her. But that’s a bad idea!   

How to ensure you get your money back?

Well, there are quite a number of things you can do to protect your investment and make sure you get your money back. For starters, you’ll need to set the terms with your friend before agreeing to giving out the loan. Consider the following in your terms:

  • How much are you lending?
  • What’s the interest rate?
  • What’s the repayment plan?
  • How much will the friend be paying every month?

It’s significant for both you and your friend become fully aware of the terms. And you can achieve this by writing up a contract listing all the agreed terms. This also acts as a record of agreement in case of any dispute.

Don’t forget to sign the contract in the presence of witnesses. They might be your other friends. If the amount of money is significant and large enough, the terms have to be agreed upon in the presence of a solicitor. You can as well seek assistance of the Citizen’s Advice Bureau.  

How do you go about setting up the repayment? 

Once you’ve transferred the money to your friend’s account, you’ll need to ask him/her to set up a standing order for the agreed amount. The next step is to confirm with your bank that the standing order has been set up.

After that, you’ll be keeping records of every repayment made. Doing this ensures that there are no disagreements of any sort between the two of you.

In cases of any changes with the contract, make sure you keep the agreement up to date. Both parties ought to sign the agreement in the presence of witnesses.

What if things go wrong?

Something are inevitable; like when the friend fails to pay back the money in time. In such a case, you can call your buddy and offer advice on how to get out of the debt. You can decide to extend the terms of the loan with the intentions of spreading out the repayments. Alternatively, you can offer him/her a “payment holiday”

Nonetheless, if the friend refuses to repay the loan and you really need the money, the legal system is the best way to go.

For loans amounting to £5,000 you’ll have to seek an independent legal advice, by which the case may end up in court. On the other hand, for loans less than £5,000 you can claim the money via small claims court.

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk