Should You Loan Money to a Friend?

If you have money and friends, the situation is bound to come up sooner or later – your buddy wants to get a loan from you. Should you loan money to a friend? Shakespeare didn’t think so. In Hamlet, ol’ Will has this line: “Neither a borrower nor a lender be; For loan oft loses both itself and friend.” An old Scottish proverb echoes this sentiment: “Lend your money and lose your friend.” Maybe these folks were right about the wisdom of not loaning money to friends, but I haven’t experienced any problems, personally, with making personal loans to pals.

I’ve given short term loans to friends many times, and I’ve never been disappointed. My pals have always paid me back when they said they would. Maybe I’m the exception. I’ve read lots of sad tales of how personal loans have destroyed close friendships. Heck, you see it on court TV shows all the time. Two lifelong best buds will be ready to kill each other over a personal loan. So should you or shouldn’t you loan money to a friend?

I think much of the answer depends on your friend or friends. First of all, don’t even consider loaning money if you don’t know the person well. You should have been in a friendly relationship long enough to have judged the other person’s character accurately. When I loan money to a friend, I’ve decided that the friend is trustworthy and honest. Through time, that pal and I have established a friendship based on trust and mutual respect.

If you have a not-so-close pal who’s in dire straits and wants to get a loan, just give her the money, if you can afford it. If she’s a real friend and a person of good character, she’ll repay you if and when she gets on her feet, even though she doesn’t have to.

Tips to successfully loan money

Reason the friend wants to get a loan: Why does Bob want to get a loan from you? This is a key aspect for some friend-lenders. Some people don’t want to loan money unless it’s for an emergency situation, while others don’t really care what the loan money is to be used for. Personally, if one of my close friends needs to get a loan from me, I don’t care how the money is to be used.

A low-interest loan or a no-interest loan? You'll have to decide whether you'll be extending a low-interest loan or a no-interest loan to your pal. If the loan is for a small amount of money, and it's repaid quickly, you might want to make it a no-interest loan. On the other hand, if the loan is for a larger amount and will be repaid over an extended period of time, you might want to charge interest. You could still help the friend out by making it a low-interest loan, with better rates than they'd get at a bank.

Make sure the terms are fully understood by both parties. The terms should include the amount of the loan, any interest involved, and when it will be repaid. For larger amounts of money, you’ll probably want to get all the specifics of the loan in writing. Make sure it’s dated, signed by both parties, and witnessed by a third party. Make copies and give the borrower one. You keep the original in a safe place.

Set up a payment plan for the loan. If your pal wants to get a personal loan just until payday, or when they get their income tax refund, you won’t need to set up monthly payments for such a short term loan. For a long term loan, set up a realistic schedule for repayment – something the friend can afford and that you can live with.

What if the friend can’t repay the loan? Always discuss this possibility. Stuff happens, and it happens on a regular basis! Let’s say your pal gets $500 as a Christmas gift every year from her grandmother. The friend is short of cash in November, so she wants to borrow $500 from you, and she promises to pay it back at Christmas when she gets the money from Grandma. What if Granny dies or loses all her money in the stock market before Christmas ever rolls around? In that case, your pal won’t get her money, so you won’t get yours, either. Now what? The short term loan has likely just become a long term loan. You can formulate a weekly or monthly repayment plan, or you can figure out some other way for your friend to repay you. Unless you really need the cash, you could use the barter system. Maybe you have some jobs around the house that need doing, like repainting your garage or staining your deck. The borrower could complete such jobs in lieu of repaying you with money.

Should you get a loan from a friend?

I’ve been on this side of the equation, also. I’ve had to get personal loans from friends a couple of times. I hated to ask, but there have been a few times when I’ve had to get a loan. These were short term loans, and none of them were very large. Since I repaid the loans very quickly, I feel sure I can get a loan again from the same pals should the need arise. Except for one close friend, the loans were made to me by friends I’ve made loans to. We’ve helped each other out several times with short term loans. So if you have no other choice, you might be forced to get a loan from a pal. How should you go about this? Read on for how to borrow money!

How to borrow money

For how to borrow money from a friend, follow the above guidelines. Go to your friend and explain why you need to borrow money. Telling her why you need to get a personal loan might be important to her. Tell her exactly when and how you’ll repay her. Suggest to her that both of you sign a written contract. This will make her feel like you’re serious about repaying the loan. Don’t borrow any more than you have to or more than you can repay. For short term loans, you might not need a repayment schedule, but for long term loans, you probably will. Most of all, don’t get a loan from a friend unless you have to.