Considering Lending Money to Friends? Take This Advise

About three weeks ago, I made the mistake of lending a small amount of money to a friend against my better judgement. This friend promised to pay me back in small installments each week over a period of time and we even wrote it down on paper and both signed it. He missed the first payment and the second and has now not returned my phone calls for a week, even though I haven’t mentioned the loan at all on any messages I’ve left for him. I can only assume it’s because of the new issues that this loan has introduced into a friendship that I valued quite highly.

Sadly, this isn’t the first time that this has happened to me, and it was because of this previous negative history of lending money to friends that led to my reluctance in the first place. After these experiences, I’ve decided to never again loan money to friends, and here’s my reasoning behind that decision.

A continuing fiscal relationship adds a new dynamic to any relationship – a dynamic that is rarely healthy. Prior to the loan, your relationship was one of equals – you would spend time together because you enjoyed each other’s company. After the loan, the relationship changes: now you’re little different than a loan officer from a bank and your friend is a client. Do you really want to hang out with your loan officer? I don’t know many people that do.

A friend’s financial need may impact your own financial situation as well. Let’s say you loan your friend $500 and then the next morning your car breaks down. For many people, they’re going to suddenly be in a bad financial place just like their friend and almost always you’ll come to resent the friend because of the additional efforts and cost. Never, ever loan money unless you’re absolutely sure that you’ll have no need for it.

If you actually feel the need to help your friend out with money, make it a gift, not a loan. Although this still introduces a bit of the “lender-borrower” dynamic, by removing the strings of repayment you make it possible to continue the friendship. If you wish, you can leave it as a “repay me whenever you feel like it” nature, but even then you’ll be introducing a bit of a new dynamic that may be uncomfortable. Instead…

An offer to help with the situation in a non-financial fashion is often more valuable than financial assistance. Let’s say your friend loses their job. You could spend your time helping them to find a new one instead of tossing them some cash so they can “make it.” If they lose their home, you could offer space in your own home for them. Seek ways to help them out of their bind without offering money or items – this way, it is clearly seen as an act of friendship, not as a material connection.

Moral and emotional support is the best support you can provide. Almost always, convincing a person to really spill out what they’re feeling and empty the pressure that’s building up in their emotional well is the best assistance you can provide as a friend. Try to encourage them to talk about the problem that brought them to the point of needing a loan, and listen to what they really have to say.

If they won’t accept that you won’t lend them money, what was the friendship really about to begin with? Think about it: what kind of friend would shun you because you wouldn’t fork money over to them when they demanded it? In my eyes, if a friendship would dissolve because of that, the friendship wasn’t a strong one anyway.

Remember, a friendship whose value you can express in monetary terms isn’t really a friendship at all, so don’t try to inject a financial relationship in there. Just don’t do it.

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  1. A friend indeed says:

    I really do not like the suggestion of telling a friend that they can “repay me whenever you feel like it.”

    That sets up a few of the potential negatives you were talking about.

    For one, the friend doesn’t know for certain whether you expect to be repaid or not. That can be a source of discomfort, at best, or misunderstanding leading to hurt feelings.

    Secondly, if you leave it open-ended like that, even as altruistic as you may feel, one day it will cross your mind that the friend hasn’t paid you back yet. Maybe it will be when he or she buys a new shirt. Maybe it will be when you are eating lunch with them and they order dessert. But it will come up. “Hey, he hasn’t even made an effort to pay me back yet.” So, I would say that the “repay me whenever you feel like it” is really not being honest.

    Lastly, even if a friend is well-intentioned and wants to pay you back and in a timely fashion, the notion of doing so “when you feel like it” can put pressure on the well-meaning friend to get it to you as soon as possible. This can make ‘hanging out’ and talking with you a bit strained. It could even lead to resentment on the part of the one who received the loan!

    My view is solid on this subject. Don’t loan money to friends and family. Give it, or don’t give it. But never lend.

  2. Ed says:

    I haven’t had any friends ask to borrow money, just toys that we have (ATV’S). But we have loaned or given money to my in-laws quite a bit. I always went into those situations as a gift, b/c I never thought I would get the money back.

    And I was right.

    It is much easier to depart with the money knowing I will never see it again (this is all based on the fact that we are able to give/loan it in the first place). If we did get some back or even a gift card for the effort, it would be an unexpected bonus.

  3. MossySF says:

    An option for lending money is to use something like CircleLending or Prosper as your intermediary.

  4. SJ says:

    I agree completely. Also, thinking of things that will actually help your friend shows that you are truly listening to them and willing to help – in one case, I bought a friend a plane ticket (via a jet blue gift certificate) because she was working a temporary job and low on cash, but had some travel needs for family obligations (she had never asked to borrow the money) – I wanted to make her life easier by a little bit, and was happy to make the gift. I wouldn’t have wanted any kind of loan to make things weird.

  5. Wylie says:

    You actually give to your friends all the time by organizing strategies for saving and managing money online! If your friend needs money it is because s/he has not spent enough time following the free advice you give on how to live frugally, work your way out of debt, and start building a cash reserve.

    I hope he/she pays up because it will 1) likely enable your friendship to continue and 2) sustain your friend’s dignity.

  6. Getzly says:

    This is how I’d handle the situation:

    If you can’t afford to permanently part with the money, don’t lend any.

    If you CAN afford to permanently part with the money, give your friend the money and ask him or her to never ask you for money again.

    You can be generous to a friend without getting into an ugly lender-borrower situation that can ruin a friendship.

  7. lsm says:

    I totally agree with you on this. And to add a little more to it… in my opinion, co-signing a loan brings the same negative aspect to a relationship. I also echo Wylie’s opinion on the free advice.

  8. Minimum Wage says:

    How about formalizing a small loan through a peer-to-peer wervice like prosper.com? This provides a little more accountability – there is a $25 cost per loan and a regular repayment schedule, plus the borrower has an opportunity to open new avenues of credit (from others, allowing you to get out of the loop) with timely repayment, or to trash the opportunity in case of default.

    I have never used this or any similar service, nor have I registered as a user, but it seems like a concept with potential for cases of this sort.

  9. I’ve been in the situation where I was the borrower. I pretty much abused the situation and didn’t pay my friend back for a long time. It wrecked the friendship. Although he got his money back, things were never the same.

    I don’t think I’ll ever loan money to a friend. You’re right the dynamics of the relationship changes. The borrower is almost enslaved by the debt.

  10. Canadian says:

    I agree with your advice — don’t loan to friends. Giving it as a gift (if you can afford that) is a better plan. If they don’t like the idea of it being a gift, tell them that when they are doing better financially they can pass it on to someone else who needs it.

  11. Pete R says:

    On the other hand…

    I have lent a large sum of money to a friend and it hasn’t changed the friendship. He was in a financially precarious situation and I had the means to help. We signed an agreement and I made it clear that the loan had to be paid monthly but it was separate from our friendship. Sure he’s missed a few payments but I tell him to get it to me asap and he will.

    I think the key is making it completely business when it comes to the loan and separating that from the friendship.

    BUT…I do agree that if you loan money to a friend it *can* turn sour but if you have a good friendship and two people who can separate the money issues from the rest of the friendship, it can work.

  12. Ted Valentine says:

    I agree. Never loan money to friends. It is ok to give it to them or make a payment for them, however.

  13. DavidM says:

    I have never had good experiences from loaning money to friends/relatives. A few years ago I gave a rather expensive gift to a cousin (who really felt more like a brother to me) for his birthday. I explained to him explicity, in front of other family members present, that the “gift” was actually an interest-free loan for the cost of the item and he could take two years to repay me. Of course he jumped on the deal. Five years later? Not a penny. And it has completely ruined our relationship. He would even lie to me by setting his own timelines to repay, but never did come through. Then he would show up on a new motorcycle or have some other new toy. When I confronted him the last time, he claimed I was speaking of a contract that never existed. Now we do not speak, other than hi and bye, and I would not trust him alone in my house under any circumstances. Please heed these words and do NOT do it folks. No good can ever come out of it.

  14. Steve says:

    I have borrowed money from my friends before because … but I have always made it a point to give it back on time, even if I still need the money. This has resulted in my friendships being “stronger” than they would otherwise be if I had delayed. For me debt to a friend is way heavier/burdensome/important that debt to a company that doesn’t know you. I didn’t mean that, but you know what I mean. :-). I cannot say the same about people who borrowed money from me. They either delay payment or play games before they pay or I end up giving up/away the money after the fact. Now that I have been reading your site and learning a lot about financial management and I am moving in the right direction, I think I will not need to borrow money from a friend, ever again! (So help me God!) and I think I will not lend money to anybody again! The first time I practiced not giving away money, it hurt. I felt mean and all. But I managed to do it. Now I just have to learn not to feel bad after lying that I don’t have money to lend anybody… (what other reason could I use!?) Great subjects, as always!! Keep it up!!

  15. DavidM says:

    Steve, I too have borrowed money from friends & family in the past. And, like you, I was eager to repay them even if it meant doing without something I wanted just to get that loan off of my mind. But I sincerely have learned my lesson. My cousin and I will never have that brother-type relationship again, even if he paid me back today plus interest! While I tried to keep the loan non-personal, his email replies to me cut deep and those wounds may never heal. If only we could go back and do things a little different. I hope one day he feels that way, but I am not holding my breath. Hindsight is truly 20/20.

  16. Michael Moulton says:

    I borrowed money from a friend once. It was soon after I started working my first job after college, in order to allow me to pay off some credit card debt.

    We did things formally, with an agreed-upon payment schedule, and he was loaning me money from his savings (he intended to put it in a CD or something with a higher yield than savings).

    In the end, he made more than he would have from a CD, I paid less interest than I would have on the credit card, and it worked out well for both of us.

    I didn’t treat the loan like a loan from a friend, I treated like any other loan. Just because you know the person doesn’t mean you don’t have to pay them on time or as agreed.

    I would never loan or borrow from a friend on a “pay me when you can” basis for any real amount of money.

  17. PF says:

    Michael,

    I did the same with my parents. They made more interest than they were making in their money market account, and we paid less interest on the money than we would have paid. It was a win/win situation.

  18. Theresa says:

    Every now and then a certain friend of mine asks to borrow something like $20 until payday, and she always trades me a post dated check for that amount. I make sure to deposit it the day after her payday so that she isn’t counting on that money later the next month. Because of this system, I don’t need to remind her to pay me back once payday comes around.

  19. AOII girl says:

    I agree with the gift idea. I used that a while ago- my sorority twin was having financial troubles, so I talked to the treasurer and gave $50, and then the treasurer told my twin that someone had donated money to be used as a scholarship, and so it was her lucky day.

    That’s the nice thing about being frugal. You can then use your acquired money for fun things :)

  20. Six Points of Advice If You’re decided to Lend the Money to a Friend anyway

    If you think your friend really needs your financial support and you decided to lend the money, here are few tips on how to strengthen your relationship instead of destroying it.

    1) Make it a partnership, win-win relationship. Make sure your friend understands this is not a favor but an investment that you are doing. In addition to the loan return maybe you would get some interest, maybe he can return you another favor, such as baby sitting your kids while you go out for the night.

    2) Put the terms in a written agreement, with a complete payment schedule.

    3) Sign the loan in front of a third party, which could be a mutual friend or a professional.

    4) Build a system which makes the loan and repayment as automatic as possible. Use web based p2p payment systems, such as google checkout or paypal or p2p lending website as zopa

    5) Be a “gentle rock”, flexible but firm. If your friend cannot repay the loan under the current terms, try renegotiating them. If you cannot, transform the loan to a gift.

    6)Make it clear at least for yourself on your decision be it a “No”,loan,or a gift. 99% of the time friendships are much more valuable even in financial terms then the sum of any possible loan.

  21. Jack from San Francisco says:

    Suggestions for the title

    Hi Trent – I discovered your email series only recently, and it is really good. Thanks for sending it, and I can’t fathom how you have the energy, time, and insight to write or assemble all this material.

    I like to file some of these, and was wondering, would it be possible for you to include some key words in the Subject Line to indicate what is in the email? That way I can find certain topics later on.

    For example, in the May 25, 2007 email, you could do:

    Simple Dollar: Home Tools; Family Travel; Home Loans

    Thanks!

    Jack Rasmussen
    jrasmussen@austinlogistics.com

  22. I have never and will never loan money to friends. But family, well that’s harder to say no too.

    We have “loaned” money to my BIL before. I say loan because we got paid back, and it was a note guaranteed by my MIL. We have also previously “Loaned” him money that has not been paid back. Those times, I just sort of sigh and shrug it off. But after he got his GF, we no longer loaned or gave him money period. Now he was supporting someone else with our money so it was a no go.

  23. Killer Bees says:

    There are two things I never do within the bounds of friendship: I never ever loan money to anyone and I never ever offer relationship advice to anyone.

    When you see a friend in pain, it’s tempting to try and take that pain away. But what happens is that you end up enemies and suddenly you turn out to be the bad guy because of their personal choices.

    If I was a millionaire who’d been happily married for 25 years, I would give advice to anyone who listened. But I’m not. So anyone who needs help in those two areas of life, I recommend professionals who can help them. That way, I help my friends and keep their friendship as well.

  24. brent says:

    killer bees: you sound like a great friend…

  25. RMJ says:

    I think for younger folks this is a little bit different. I’m 23, and I’ve loaned a friend $20 once or twice – sometimes they repay me, and sometimes they don’t. This small amount of money can make a difference if your account is overdrawn or there’s some other short-term young-person emergency, but it’s not going to hurt anyone too bad to repay it or forget about it.

  26. tentaculistic says:

    DavidM: “A few years ago I gave a rather expensive gift to a cousin… for his birthday. I explained to him explicity… that the “gift” was actually an interest-free loan for the cost of the item and he could take two years to repay me.”

    Wow. You gave him a huge debt for his birthday? How… sweet.

    No really, I’m thinking you’re on a WHOLE other planet than the rest of us. I think this discussion is about “loaning money”, not, um, “simultaneously handing someone a gift and an installment plan for them to pay for their own gift”. I’m not sure what that is, or why he would ever agree to it. I suspect strongly that his version of the story is quite different from yours…

  27. princess_peas says:

    I quite like terms such as “Don’t worry about it for now, but repay me the favour if the situation reverses.” Now whether this is buying coffee for a broke friend so we can have a coffee together, or giving them £20 because they’re in a pinch, or buying something they obviously need but haven’t asked for, or whatever, I think it maintains a friendship but it cuts both ways.

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