How to Loan Money to Friends the Right Way: An Informative Guide

There are certain things you need to do when you loan money to friends. You can check out our helpful guide by clicking right here.

Your heart might be full for your loved ones, but should your pockets be, also?

If someone you care about is struggling financially, it can wage an internal battle, leaving you confused and unsure where to turn.

On the one hand, you know how much a little extra money would help. However, you’ve heard horror stories about what could happen when you loan money to friends and family members. You cherish your relationship and don’t want to see it ripped apart.

The good news? It is possible to be generous while standing your ground.

Today, we’re sharing a few steps to take that can help the personal lending process go as smoothly and successfully as possible. Read on to learn more!

Don’t Be Pressured

Let’s be clear from the very beginning: You should only loan money to someone if you personally feel driven to do so. You should never be guilt-tripped into generosity.

In these situations, it’s easy for the asker to adopt a desperate or pleading tone to try and convince you to make a move. It’s not uncommon for them to bring up times they’ve helped you in the past, or draw upon emotional connections you share. Still, it’s important to hold firm.

If you hand over cash without being totally confident that you want to, it creates an atmosphere of resentment from the very beginning.

This is even the case when parents loan money to their children. You cherish them to the ends of the Earth and back, but the Bank of Mom and Dad shouldn’t have a revolving door. As outlined in this article, it’s your money and your choice. You shouldn’t feel obligated to extend financial support.

If you aren’t able to lend the money or simply don’t want to, you’re completely within your rights to offer a simple refusal. Keep it simple and say, “I’d love to help but I don’t have the money right now” and let that be it.

Keep Your Lending Limit Lean

In short, don’t lend more than you can honestly afford to give up. Factor in the fact that your loved one might not pay you back, and make sure your finances can handle the impact if that’s the case.

This person might be as trustworthy as they come, but there are always extenuating circumstances that could happen to prevent them from keeping up their end of the deal. That’s why it’s best to lead with your head, not your heart. Only give money that you’d be fine never seeing again.

This worst-case scenario thought pattern might sound pessimistic, but it’s realistic. This is especially the case if your loved one has a long list of creditors to pay back. When weighing their mortgage, auto loan bills, credit card invoices, and personal loans, they’ll likely put your repayment last in line.

Establish a Repayment Schedule

“Just pay me back when you can” doesn’t work in this situation.

Instead, you need a well-thought-out plan that establishes clear timelines around when you expect to be paid back. Otherwise, your loved one might think that you’re both on the same page when you’re on entirely different planes.

It might feel a little stuffy and too formal, but it’s important to write down the timeline and have all interested parties attach their signature to it. In addition to the terms of the repayment, also include key details on exactly how much money you’re loaning and any interest rates, if applicable.

This way, there’s no question as to when the other party will need to come up with funds. You’ll also have a solid understanding of when the money will be restored to your account, so you can plan future investments accordingly.

You also avoid the chance that the recipient might think of the loan as a gift. A written timeline makes it crystal clear that this is an official loan and will be treated as such.

Get Everything in Writing

Again, this might feel like overkill, but its importance cannot be overlooked.

Never share the terms of your loan verbally and expect everyone to remember all of the important details years down the road. Instead, create an official loan document and include every fine-print term therein.

If your loan is simple, you can find a loan template online and populate it with your information. The key details to include are:

  • The date of the agreement
  • The loan amount
  • The final due date for paying the loan back in full
  • The repayment schedule
  • Agreed-upon late payment fees
  • Interest rates
  • Contact information for both lender and borrower
  • Signatures of both lender and borrower

When it’s completed, print out enough copies for all key stakeholders to have. Keep the original one, with everyone’s signature, in a safe and secure location, like your security deposit box at the bank.

If your loan is more complex, it’s wise to hire an attorney to take care of this step for you. Complex loans include collateral-based lending agreements, as well as any loan that surpasses $10,000.

What is the purpose of this document? In essence, it moves the relationship out of the way and establishes the loan as a separate, transactional process. Down the road, if there is any confusion or cloudiness about a certain term, everyone can bring out their copy of the loan and double-check the line items.

Loan Money to Friends the Smart Way

If you’re financially able to give and feel comfortable doing so, you can loan money to friends and still keep a healthy and vibrant relationship with them.

Challenges arise when the lending agreement is born from resentment, isn’t clear, or leaves the lender feeling vulnerable and exposed. As long as you follow the steps above, you can create an agreement that everyone feels great about.

For more business tips and advice you can trust, check back often on our blog!

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