Ask These 4 Questions Before Loaning a Friend Money
Lending money to a friend could backfire, so make sure you're really comfortable with it.
- Lending money to a friend could compromise that relationship and put you at risk of not getting your money back.
- If you're going to give out a loan, make sure you've thought things through and assessed your friend's financial situation.
There may come a point where you're asked to loan a friend money. Maybe that friend has medical bills that are monopolizing their income. Or maybe a friend recently lost their job and needs some money to stay afloat.
Lending money to a friend can be tricky. You may want to do so graciously, but also protect yourself and limit the risk of not getting paid back. Before you agree to lend the money, ask yourself these four important questions to make sure giving out that loan is a good idea.
1. Am I in a solid position to lend someone money?
Before you can even contemplate loaning a friend money, you'll need to make sure that doing so won't hurt your finances. Take a look at your savings account balance. If you have a solid emergency fund -- enough money to cover three to six months of living costs -- and still have some cash left over to lend out, then you may be okay to proceed with that loan. But you shouldn't raid part of your emergency stash to bail a friend out of a jam.
2. Does this friend have a solid financial history?
If the friend who's asking for a loan is someone who's historically struggled to manage their money, then you may want to gently turn that friend down. Old habits can be hard to break, and the last thing you want to do is put yourself in a situation where your loan becomes an inadvertent gift -- and a friendship is ruined.
3. What's a reasonable time frame to get paid back?
It may be the case that a friend of yours is experiencing a temporary hardship and needs some money to get back on their feet. But if you don't see your friend's finances improving for a long time, then you may want to think twice about giving out that loan. If your friend recently got laid off but has long held down a steady job, lending that person money may be a less risky prospect than loaning money to someone who's been underemployed for years.
4. Will this loan impact the friendship?
Before you can consider loaning a friend a lump sum, think about how you might feel to see your friend spending money before paying you back. If, for example, you're pretty sure it'll bother you to see your friend dining out at restaurants or buying new things knowing you're owed money, then you may need to bow out. If you don't, you could begin to harbor feelings of resentment that hurt your relationship.
Loaning a friend money may be a nice thing to do, but that doesn't automatically make it the right thing to do. That said, if you do decide to move forward with that loan, draw up a document that outlines its terms. That should include a repayment schedule or date, even if it's a loose one. That way, you'll set clear expectations that could make the situation easier on both you and your friend in need.
Alert: highest cash back card we've seen now has 0% intro APR until 2024
If you're using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.