Should you lend money to your friends and family?

Ask what the loan is for

Credit: antonioguillem/123rf

1/5

Before you say yes or no, as friends, it should be okay to probe what the loan is for.  Maybe they need a small amount because their money app is not working or they left their phone and wallet at home.  For bigger loan amounts, there could be a family emergency or a medical crisis.  These are situations where you may want to say yes and help out.  But if the loan is for a last-minute vacation or a new designer bag or upgrading to the latest mobile phone model, saying no may be the more responsible thing to do.

With or without interest?

Credit: yuliang11/123rf

2/5

Between friends, it’s an unspoken rule that any loan will be without interest.  So when someone approaches you for money and suggests paying interest, that is a red flag.  If they can afford to pay interest, why won’t they apply with a bank or financial services companies, or charge it to their credit card?  Could it be they have used up all available resources and now desperately turning to you?

Set payment terms

Credit: tomwang/123rf

3/5

If you have decided to lend money to a friend, make sure to agree on payment terms.  Do not postpone this discussion to a later day, thinking he or she needs the money now and you can talk about payment later.  The truth is you are more likely to get a solid commitment before you hand over that loan.  If you want to see your money again, set the payment schedule.  Will you be paid next month, or the month after?  You may want to tell your friend that you will need the money by a certain date, for example, before you go on the next family trip or settle the next car payment or kids’ tuition if you have any.

Keep your lips sealed

Credit: wutwhan/123rf

4/5

Just because you helped him or her out does not mean you have to tell the world about it.  Respect your friend's privacy especially if there is a good reason for the loan.  Some borrowers choose to tell others, and if it makes you uncomfortable, make that part of the condition when you give the loan. Keeping your lips sealed also has a benefit for you, after all you don't want it advertised lest more borrowers come knocking on your doors.

How about a cash gift?

Credit: watchararitjan/123rf

5/5

Many soured friendships will blame the breakdown of their relationship to money.  If your friend is unable to pay you back, they may avoid you.  In case they don’t and worse act like the loan does not exist, you may be the one to decide to cut ties.  One way some friends have gone around this potential problem is to just offer a cash gift instead of a loan.  Truth is, if the loan amount makes you uncomfortable, or just loaning money at all, those are your gut feelings that you should not ignore.  Consider lending a smaller amount, or if you can afford it, giving it as a gift to help your friend out of her or his difficult situation.  This way, you helped but do not have the burden of collecting on a loan your friend will have difficulty paying back.