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.
Updated January 16, 2010 and originally published June 8, 2006.