There are few more stressful and frustrating things than being in debt due to something out of your control, such as an emergency service fee or medical bill. You have most likely had to figure out where to turn to quickly for money so that you do not end up in a financial mess. Often, that place to turn ends up being a friend or family member.
But what should you do when your friend or family turns to you for that money? Should you offer to give them a loan or avoid lending money to friends altogether? Here are a few things to consider when making that decision:
Tips for lending money to loved ones
First determine if you can afford to lend money
Before deciding whether or not to lend money to friends, you need to determine what your current financial situation looks like. If you are also in debt or do not have much of an emergency savings fund, then you are not in a place where you have disposable income that should go anywhere else.
You need to get your own finances in order before helping others. We recommend trying the avalanche method debt strategy as it creates an actionable plan for how you can get out of debt quickly. Once you are debt-free, you will be in a better position to help your loved ones in need without having to worry about your finances.
Clearly layout repayment terms
You might feel like it us too awkward to want clearly laid out terms for how you will be repaid and what interest (if any) will accrue, but having this awkward talk now will save you both from much more difficult conversations later.
Sit down together and hash out, in writing:
- How much you are lending
- What the repayment terms are (monthly, weekly, etc.)
- How much the payments will be
- How interest will accrue
- When the loan maturity date will be
- What happens if payments are late or your friend cannot pay you back in full
Assume you will not get paid back
Many experts recommend seeing your loan more as a gift than something that will be paid back to keep it from affecting your relationship. Only lend money to friends that you are comfortable never getting back and learn to say “No” if giving that money away would affect your finances too severely. While everyone will probably go into the loan with the best intentions, things that are out of our control can affect if your friend will ever be in a place to pay you back.
The bottom line
Lending money to friends can be a great way to help a loved one in need if you can afford it. Just make sure to put everything in writing, have a payment schedule they can handle, and be comfortable accepting that your loan may end up being a gift instead.