Should You Lend Money to Friends?

The short answer is, probably not.

Why?

Because, much like sex, when things go wrong it can leave you in a sticky, awkward mess. Let’s examine the potential for fallout and how you can minimise the damage.

The Uncertainty Factor: Loans to family and friends tend to be loose, open-ended agreements. Because, unlike the bank, we don’t usually require forms to be filled in and securities tendered. The problem with ‘Pay me back when you can’ is that it puts your dosh right down at the bottom of their priorities. Then, the longer the loan drags on, the more awkward it becomes to mention it. This is especially true with smaller size loans – ‘Don’t forget that $65 you still owe me from LAST November‘.

Damage limitation? Be clear (and honest) from the get-go. Explain that you are happy to loan the money, if they are happy to commit to a realistic timeline to re-pay it – say $200 a month for the next 4 months. Even better, get them to set up a direct debit with their bank so there is ‘no need to ever speak of this again’.

The Imbalance Factor: Most good relationships are built on mutual respect and on a fairly equal footing. With a loan, the balance of power can subtly shift, with one party often left feeling beholden to the other. Whilst our friendship groups might consist of mates from varying economic landscapes, once we ‘owe’ one of them it can leave us feeling a little lopsided.

Damage limitation? If you choose to loan the money, try not to be superior about it. In life, most of us have the potential to lose our footing at some point, and it can be comforting to know that you’d be treated the same way if you had been the one asking.

The Judgement Factor: If we think of the loan as ‘our money’ it can be very easy to judge how it is being spent. I lent some ‘desperately needed’ money to friend a few years ago in London and still remember my surprise as she waved at me thankfully from the pampered comfort of a black cab. Whilst my definition of ‘desperate’ was more akin to a can of baked beans and a paid gas bill, hers clearly was not.

Damage limitation? If you lend it and are happy with the re-payment terms, try and reserve judgement. Because, technically until then its their money, not yours. That said, a lot of money-related damage I have witnessed over the years has been about problem spending. If you have the whiff of an inkling that booze, drugs, gambling or excessive shopping might be at the heart of the request, you would be wise to keep your wallet firmly zipped.

The Financial Factor: Aside from the potential for uncertainty, awkwardness and resentment, there is also the small matter of the actual money. And, the very real chance you might not be getting it back.

Damage limitation? Only lend money on the basis that non– repayment would not change your relationship or ruin your plans. If you are going to get snippy about that $150 not finding its way back to you, then it’s best not lent. If that $2000 loan is going to leave a significant financial hole, politely explain that you simply aren’t in a position to pay out. Or, if you can afford it and genuinely want to help out, then gift them the money with no expectation of diddly-squat in return.

Personally, I prefer to leave the dollars and cents out of it. I’d sooner lend a spare bed (or sofa), gift them a grocery delivery, take them out for a nice dinner, offer them my time/love and support or get them agreeably smashed depending on the circumstance.

Which brings us back to the short answer.

Should you lend money to friends? Probably, not.

This GET RICHER post is brought to you by someone who never makes the same mistake twice. I make it like five or six times, just to be sure.