Lending to Friends? Beware!

Times are tough, credit's tight, unemployment is high, and suddenly you've found that some of your friends are out of work and hurting for cash. Not only this, but these same friends could be looking to you for a little assistance during this financially painful time. Or maybe it's that you are such a great friend you just feel that you should help them out without them having to come and ask.

The idea of loaning money to a friend might seem empowering at first. Maybe you envision yourself a 'mafia don', doing a 'favor' for your underling who is forced to kneel before you and kiss your ring. It could be that you have only their best interest at heart. Whatever the case, you don't want the situation ending up on an afternoon television court program, with you and your friend going at it like Pit Bulls after a Chihuahua. While loaning money to friends can raise some dangerous issues, it doesn't necessarily have to end in catastrophe. Here are a few things to consider before you go shelling out the cash.

Limits

As with most friendships and relationships, there should be limits when it comes to lending. Overextending yourself when lending a friend money, could help them out of their financial hole, only to dig you into a hole of your own. It's pertinent to ensure that you keep proper perspective on how much money you are able to lend a friend, as well as for how long. Setting reasonable limits upon your ability to provide financial assistance to your friend or friends, and ensuring that they understand these limits, can help reduce confusion and decrease the chances of getting yourself in too deep when it comes to lending.

Discuss Expectations

While limits are important, ensuring that the parties involved in the financial transactions understand those limits and expectations before money ever changes hands can be equally important. Talking about money with anyone can be uncomfortable, let alone with a close friend. However, to help diminish the chance for problems down the road, discussing the amount to be lent, the timeframe for the loan, how the loan will be repaid, and what happens if it isn't, can help get all parties involved on the same page. It is important that you be honest during this time, as you are doing this friend a favor by lending him or her money, and this friend should return the favor by openly and honestly discussing how that money should be repaid.

Get it in Writing

You might feel uncomfortable asking a close friend to sign any sort of documentation or contract when it comes to a loan agreement. Doing so could make things uncomfortable and you might feel it is a sign of a lack of trust or respect in the relationship. Still, it is important to have some type of written record of the transaction to protect yourself and your friend if from nothing else but confusion or misunderstanding. While a written contract outlining the terms of the loan is probably the best case scenario (and hopefully the friend will bring it up so you don't have to) if you don't go this route, it's a good idea to ensure you don't deal in cash. You may be able to skirt the issue by writing a check and writing something to the effect of "loan" or "loan" and the timeframe involved (example: "loan to be repaid in 2 months) in the check's memo line.

If there are issues with repayment, you will probably want to keep documentation of discussions or communications regarding the loan. Things like emails, texts, phone messages, even a journal of dates and items discussed relating to the loan could be helpful should you have to seek reimbursement through the courts.

Be Prepared

You never know what money can do to friendships, so being prepared may help you to deal with whatever happens due to the lending of money to a friend. While you probably don't want to consider worst-case-scenarios, it's probably a good idea.

Obviously, typical scenarios might revolve around a friend not paying back the money in a timely matter, or at all, and the dissolution of the friendship. There are however, other situations that, while they might not cause the friendship to dissolve completely, can certainly put a strain upon it.

At times, lending money can become a bit of a power trip for the lender. It can be used as leverage to pressure the other person, or held over their head as a constant reminder that you've helped them out, causing feelings of guilt and resentment. Even just bringing the topic up in jest can result in feelings of embarrassment or hurt a friend's sense of pride. The bad part about this is that you may not even realize you are doing it until it's too late. Therefore, it can be important to consider these factors in advance to your lending of money to a friend. This may help you to avoid missteps while at the same time assisting a friend in need and preserving your friendship.

Disclaimer:

The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute legal or financial advice. For financial advice, readers should consult a licensed financial advisor. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.