How To Loan Money To A Friend (And Up Your Chances Of Getting It Back)

Considering loaning money to a friend? If you can't afford to lose it, don't loan it.

An old proverb states, “Before borrowing money from a friend decide which you need most.” One could certainly say the same about lending cash to a friend. If the borrowing buddy fails to pay you back, resentments may build that could end the relationship. The best advice is that if you can’t afford to lose it, don’t loan it.

Sometimes, though, a friend’s financial emergency tugs on your heartstrings and prompts you to open your pocketbook. Before you agree to a temporary loan between friends, however, learn some wise tips that can improve your odds of getting your cash back (and preserving your bond).

Stick With Cash

If you really want to help a friend with a financial problem, stick with giving a loan rather than cosigning for one. Cosigning could damage your credit and cause you to lose money or property if your buddy fails to repay the loan.

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Get All The Info

Before you commit, ask questions to find out as many details as you can. What is the loan for and what are the circumstances? Does your friend have a history of bad money choices? Can they afford to pay you back? Can you afford it if they don’t?

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Establish Clear Terms

Failing to state plainly how much you expect your friend to pay you back and when could result in a misunderstanding. Spell out your expectations, such as the total amount you want back and the date you require it by to avoid any confusion or misinterpretation.

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Put It In Writing

Write a loan agreement or use a promissory note template to protect yourself and your friend. Written documentation makes it a binding agreement and removes any misconceptions about repayment. You should also write receipts if your friend repays the loan in installments.

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Be Proactive

Don’t wait days, weeks or months if the loan comes due and you haven’t heard from your friend. Make a friendly but firm phone call or visit to find out what’s up. It’s possible your pal simply forgot the date and has the cash waiting for you. You don’t have to be rude or pushy when your friend misses a payment, but you shouldn’t be shy or beat around the bush, either. Remind your chum politely but directly that payment is due.

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Write A Reminder

Putting a demand for repayment in writing provides documentation that you made contact. A mailed letter might be a bit formal for a loan between friends, but sending a text or email gives you a record and lets your buddy know you mean business.

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Offer Options

If you discover that your friend is struggling to repay you, discuss alternative options together. Possibilities might include minimal payments on a weekly or monthly basis, trading something of value in place of money or creating a barter arrangement that allows your friend to work off the loan amount.

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Be Prepared To Forgive

It is entirely possible that your friend cannot or will not repay the loan as promised. You must decide whether your friendship means more than the money as well as whether you can afford the financial loss. If the answer to both is “Yes,” let it go and move on with life. You might even get a tax break.

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Learn How To Say No

If you don’t feel comfortable lending cash to a compadre or the extra cash simply isn’t in your budget, avoid the stress of giving a loan by just saying no. Provide a concise but clear answer, such as, “I’m sorry you’re in a tough spot, but I’m not able to help you financially.” If you feel compelled to help, do so in a non-monetary way by  offering your time or advice instead.

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[h/t: The Penny Hoarder]

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