Deciding When to Lend Money to Friends
Has a friend recently gone broke and asked you for a money loan to cover their expenses? Before you rush to say "yes" or "no," it’s wise to ask yourself these questions:

  • Is my friend really in need?

  • Do I trust my friend to repay me?

  • Can I afford the amount asked for?

  • For a large amount of money, can I proceed with the lending officially via a legal agreement?

Answering the above questions truthfully, with both individual's financial welfare in mind, will help you decide whether it's wise to lend your money to a friend. Additionally, here are some situations when it’s almost always appropriate to answer "yes":

  1. It's the first time this friend has asked you for a loan. If they haven’t asked for this before, odds are that this is a friend truly in need. Keep in mind that you do know your friends, and you probably have a pretty good idea of what kind of crisis your friend is in. Hear him out, be open and receptive to his request, and assuming that this isn't part of a pattern of financially reckless behavior, take comfort in knowing that this is likely a one-time deal

  2. Your friend is only asking for a small, affordable amount. Consider for a moment how much money you would accept losing should you not be repaid. Less than $100? Less than $1000? If your friend asks for a small loan, and if you can afford it, you're not putting yourself at a huge risk. Sure, you'd ideally like to be paid back, but this is a worst case scenario situation. If you're only dealing in small amounts of money, it may be worth your while and for the sake of your friendship to just help out.

  3. Your friend helped you in a similar situation in the past, and you want to return the favor. You've probably found yourself in a similar position: some unexpected payment came up or you got fired from a job, and suddenly you were in need of a loan. It's only natural to turn to friends for assistance. If the friend requesting a money loan from you has helped you through your own financial struggles in the past, it would be of bad character to decline their request for help.

And here are some situations when it's almost always best to answer "no":

  1. Your friend has asked you at least twice in the past for money loans without paying you back. This represents a pattern of bad financial decisions. At this rate, the odds of your friend paying you back become lower and lower every time you agree to assist him. If your friend thinks he can borrow from you without having to pay it back in the future, he's going to keep trying to do so. Remember that while helping out a friend is a good deed, you're also responsible for protecting yourself.

  2. You know your friend will be using that money to feed addictions. If you know your friend is going to be using the money you lend for alcohol, drugs, or any other kind of addiction, refuse the request. Choosing not to fund someone who you know is going to use the money dangerously is not a mean or cruel decision, though your friend may try to make you believe this at the time; in fact, you would be doing a huge service to your friend by refusing to encourage their addictive behaviors.

  3. You simply can’t afford to lend your friend any money. This is the most straight forward way to decide whether or not to lend money to a friend. If your friend asks for $500, and you don't have $500, no further discussion is necessary. Only lend what you can truly afford. You don't want to start incurring debt of your own as a result of helping out a friend. He may be having a financial emergency, but if you don't protect yourself, you could find yourself in the same situation.

If you want to take the legal route for safety reasons where large amounts of money are handled, both you and your friend need to sign an agreement for collection and repayment terms. A simple handshake and discussion are not enough, and you can’t take legal action unless there is a signed contract between both parties. You’ll need to consult with a lawyer in your state to guide you through the procedure. States laws on private loans vary from state to state, but generally speaking, the interest rate remains under 18%. If the period of repayment approaches or if your friend has failed to pay, you can send a reminder first and then a demand of the amount due. It is illegal to harass or threaten the person or his friends/relatives in any way to collect the money – when in doubt, discuss the matter with your attorney.

Deciding to grant a loan of a big amount is certainly not an easy decision to come to, and if you have doubts at all, it's best to kindly reject the request. It may sound a bit harsh at first, so be sure to explain why you are unwilling or incapable of helping out without creating conflict. The simplest thing to tell your friend is that you just don’t have much money around at the moment. Only lend money to a friend when you are certain that both parties are responsible and mature enough to follow up with the exchange. That will make for a much better situation than worrying about being repaid or having to take legal action to get your friend to pay you back.

Good luck!