G. over at How to Make a Million Dollars has a big warning, Don’t Lend Money to Your Friends. His advice stems from his being burned by a friend once. In this case, his friend took a long time to pay the money back.
I can’t agree with the absolutism of his advice. When you lend money to a friend, you’re taking on risk. The friend may feel a familiarity with you—more so than with a bank—so he or she may not be motivated to pay you back on time. And G. is also correct with his statement that money can cause stress in any relationship.
If you have a strong friendship, and if you’ve measured the risk (you know your friend well, so you should have a pretty good idea about his or her character), and the risk of losing the money is acceptable, I see no reason not to be a friend and help someone in need.
There are a number of variables to weigh before you make the decision, but if you’re in a position to help, you should do so. Here are some things to think about:
- Why does my friend need money?
- For what is the money needed?
- Is he or she generally responsible with money?
- Can I afford to lose this money?
- Is the friendship strong enough to survive if I lose the money?
- How much interest should I charge?
If you base the interest you charge on the perceived risk, while being fair as you are dealing with your friend, you should feel fine about your decision to lend the money.
I wrote about lending money to family last year, and most of the article applies for friends as well as family.
Subscribe
10:17 am (reply)
I agree that it is a bit of a judgement call. On the few occasions on which I have lent money to friends, I have always considered that the friendship was more important than the money. Maybe I have been lucky – I have always been repaid in full and as reasonably promptly as the friends’ circumstances would permit. Had things worked out differently, no doubt the friendship would have come under pressure. Incidentially, I did not charge interest on the loans.
3:51 pm (reply)
If it’s an amount you can afford, why not just GIVE it to them?
5:54 pm (reply)
If it’s a small amount, sure. Otherwise, let them get money from prosper or zopa(soon to be out in US) if they really need a larger amount.
I think there was a saying, “If you lend money to a friend, be prepared to lose the money or the friend.”
10:24 am (reply)
I wholeheartedly agree.
9:52 am (reply)
I loaned $1400 to a friend back in Feb 2005. Got back $700 of it within 2 weeks and that was it. I still see him on occasion but he never brings up the fact that he still owes me $700. All of my friends tell me that I should say something but I’ve never been the confrontational type. It’s now to the point where we hardly talk. I’ll have a dilemma if and when he gets married (ie. wedding gift) I suppose a card with nothing in it with a memo : “you still owe me $500” should suffice… DON’T DO IT !!!
9:39 pm (reply)