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.

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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