You should never take a good friend for granted.
Today I am dedicating this post to a personal friend of mine who has enough dexterity and serenity in her spirit to never…scam me out of money.
Sadly, money and friendship disputes are much more common than you think. Almost everyone has a dispute money story with an ex-friend.
Loaning money to a friend often results in the loss of money and friendship. The reason is obvious. Loans to friends – no matter how close they are to you – are open-ended. So by loaning them some money, you also run the risk of not getting paid back.
This is where the issue comes in, you are involving money and power disparity when friendship is about equality.
Does it mean that you must never loan money to a friend at all? The answer is no.
Loaning money to a friend is not at all times a bad idea. Here are some signs that tell you it’s OK to lend your friends some money.
Emotions can fly high. But if your emotions are already high, and you are here because you are afraid of possibly losing money that you will never likely recover, think about your own financial circumstance and theirs.
All I can say is this: it takes an enlightened friend to understand that money is not the great equalizer.
Money makes certain events less stressful but not any less sad. If my dog died tomorrow, money is not going to stop me from mourning the loss of my dog. Bill Gates is allowed to feel sad just like anyone else, duh, because money up to a certain point is completely useless.
To be a good friend – even if they only have a handful of the traits we will discuss right below – it still might be worth helping them out:
A close long-term family
To some people, there is a difference between loaning money to a friend vs a family member. In my opinion, there is more obligation and pressure when it comes to a family friend or family member than just a regular friend. Lending money can either break or make your friendship. If you say no to a favor, it could bring your family relationship into limbo.
You can also direct them to financial alternatives, for example, serve as a signer to a bank loan or provide the help that your friend needs to obtain a loan from a banking or credit facility.
You’ve been friends for 10+ long years
A friend who has been with you through the years most likely deserves a loan, but the judgment call will always depend on you. If your long-time friend confides that she is having money problems, don’t dig into your pocket immediately. Try to learn more about her situation first.
If your friend sincerely needs money for an important reason then lend her the money, so long as you can afford it and make the terms clear if this will be a loan or gift.
You should know a close, longtime friend more than anyone. If your friend is complaining about her financial woes while still having a good time in a fancy night club every night then there’s definitely something wrong there. Never lend money if your gut instinct is telling you “no.”
They were never intrusive about your finances
It’s okay to lend a friend some money if she has never been that intrusive about money in the past. Your friend is probably just having a real money problem and needs your help. But you also need to be careful and study the situation.
Conduct an extensive evaluation of whether your friend truly deserves a loan. Ask about why they need the money, have a clear picture of their financial situation, don’t live in doubt about this situation. You need to see how genuine your friend is in their purpose for money.
For example, if they need it to make a down payment in order to purchase a car or a mortgage loan, honestly, do not bother lending them the money.
Borrowing money to take on another loan most likely will result in a larger financial disaster for them and you may not really be doing them a favor.
There was an unforeseen emergency and your friend has no control over the issue
It is really hard to say no to a friend who lends money for an emergency. They say it takes time to gain friends but money; you can easily earn it by working.
So let your friend borrow money because it is probably the only way to save life. But only lend the amount that you can easily write off immediately and which you wouldn’t be bothered if it is not returned.
It can be mutually beneficial for your friendship in the future
Friendship is a give-and-take relationship. If you are open to each other about financial matters, then it’s OK to lend your friend some money because you can expect most likely that they will have your back in the end as well.
It can be beneficial for both of you, strengthing friendship bonds by holding each other over difficult and tight times. Important things like needing extra money to process a working visa or paying off the electricity balance for their apartment is a small gesture with a large impact. When you help a friend achieve something, they will most likely reciprocate the same to you in the future.
Fortunes can turn easily. So try to put yourself in your friend’s shoes. What if it was you who needed the money? If you let your friend borrow some cash, then there is a high possibility that she could return the same favor in the future.
Your friend has always been open-minded about other issues
Sometimes no matter what, the answer is no. There is nothing wrong with saying no. It is YOUR money after all. They need to respect that.
A friend who talks about all other issues in life is someone you can trust and feel comfortable saying no to. Since you know everything that is going on in their life, it should be easier to make a judgment and tell them what the answer will be.
Your friend possesses humanness
Lending money and paying it back is a moral matter. If you believe your friend possess humanness and conscience, you can trust that she will return the money when you need it.
A friend that possesses this great quality is someone who sticks around through thick and thin. They will not backstab nor lie nor pressure to you. Rather, they are honest in all aspects of your friendship even if it hurts you. This is the type of friend who cares genuinely enough for you to trust that she will not do anything to break your friendship.
You are doing OK financially
Being financially OK means you have extra money to spare in case your friend doesn’t pay the loan back on time. This may also mean that you have put up several months of an emergency fund, paid off credit cards and bills, and have a comfortable financial life.
Additionally, if you have some money in the bank and not worrying about whether your friend can pay the loan, let go of some cash and help your friend out.
Your friend is willing to agree to a firm repayment timeline
Creating a timeline for the repayment of the loan avoids instances wherein you would feel awkward in asking the money back. If your friend agrees to a deadline, it means she is willing to return the money and not just run from it.
All you need to do is lay down the rules in a nice and subtle manner. For example, “Ben, I’m happy to lend this money to you but I would need it back before 4th of July. If you can pay me $100 per month, the loan will be paid off by then.”
It’s part of a business that involves both of you
If you are entering into a partnership, you can lend your friend the money so you can put up the business together. However, your friend must agree that you will get the money owed from his share of the profits instead of splitting it together.
You can ask for equity in the business itself instead of asking for cash as payment. If the person knows what she is doing and has a solid business plan in place, she would most likely come into an agreement with you.
You really mean it
If you’re just lending money because you feel desperately guilty for a friend, you’re making the wrong move. When you’re motivated by guilt, you are more likely to regret lending money when your friend doesn’t pay it back.
Only cough up the cash only when you’re fully willing to lend money from the bottom of your heart. This means that you also accept the risk of late payments or not getting paid at all.
It isn’t a large sum
If your friend borrows a few dollars just to cover for lunch – then why not? A small amount of money is not so hard to return especially if your friend has some financial resources to repay the debt. So just lend her the money and let it go. If she pays it back, great. If not, then you can consider it is a gift for friendship’s sake.
Your friend can pay it
There’s nothing to fear if your friend has a full-time job, hard worker or running a successful business. A friend who has the financial resources can repay the loan for sure is a lot more comforting. Just make it clear to your friend when you need the money back with a clear deadline.
Your friend agrees to put the loan into writing
Loans that involve big money need to be put into writing. If your friend is willing to draw up an official loan document, it means she will most likely take the loan seriously and pay it back on time.
Loans that are more than $1,000 are big enough that your friend should understand the need for documentation. Having a written document is easier when you have to take them to small claims court, it will be an open and shut case.
Your friend is will pay for interest
It might sound unusual but there’s nothing wrong with charging interest to your friend but if your friend offers to pay interest then accept it. It’s a good sign that they are serious about paying it back.
A most trusted, admired friend
It’s definitely hard to say no to someone who has become a trusted friend. If you truly trust the person, just lend them the money and be confident that you’ll get repaid. If not then you can downgrade their trusted, admired friend status. A trusted friend is someone who cherishes the friendship that they would never do anything to break it over a few chunks of cash.
Your friend is responsible with money.
Your friend has borrowed money from other people and has paid it responsibly. Or your friend has a loan from a bank and has earned a sparkling credit score after paying it on time every time. A person who has a good credit history is more likely willing to repay the money on time.
Do be careful if the same friend asks you for a loan for the second time and you find out that she is also doing the same with other friends, you should be careful.