My friend wants to borrow some money, what do I do?

How to loan some money without losing a friend.

First, are you sure it’s not a gift?

If your friend doesn’t have the income to support their regular bills plus the payments on your loan, you might end up unwittingly giving them your money.  If your friend might have an interruption to their income, your loan is probably the last thing on their priority list.

Is this person a friend you want to hang out with from time to time?

Once you’ve loaned out your money, the debt is going to hang over your relationship until it is repaid.  If there are problems during repayment, or you have to take steps to ensure collection on your loan, your friendship will probably never be the same again.

Are you headed down a slippery slope?

Once you fund your friend with cash, are they going to come back and ask for more.  You might become their new favorite bank if they can make withdrawals from you.  Are they going to tell your other friends?  Will they spur the great exodus of friends from your life as you end up either loaning money to everyone or denying their requests?

Show your friend what they are expected to pay.

Create a written document that describes the nature of the debt, the interest to be paid, and the repayment schedule.  Our loan servicing software, Moneylender Professional, is really helpful here.  You can lay out the terms in the system and have it generate an Amortization Schedule – the list of all the payment dates and amounts to be paid over the life of the loan.  You can even create a template for the loan agreement, and have Moneylender print it out for the borrower to sign.  This is especially helpful if you will be making more than one loan.

Check their finances.

You already know this person, and you wouldn’t have gotten this far along if you didn’t think they were responsible.  It’s a good idea to ask for copies of their most recent bank statement – at least if the loan is going to take more than six months to repay.  A little official due diligence can change your friend’s perspective a bit to treat this loan like a real loan, and if there’s something on their bank activity that catches your attention, it might save you from losing your money.

Get a signature.

Have you friend actually sign a loan agreement.  If you need to press to get your money back, having a signed agreement will help you file a claim or send them to third party collections.  By that point, we can safely assume the friendship is dead.

Pay the money directly to where it should go.

If they’re buying a car, pay the money straight to the seller.  Paying a contractor?  Cut the check directly to where it should go.  I have all kinds of friends, and even ones I would consider trustworthy succumb to various temptations at the most unexpected times.  If your friend needs the car, make sure they get the car.  If it’s a loan to help cover expenses during a temporary crisis, you can give the funds directly to the borrower.

Provide your friend with regular statements.

In business, a key to improving something is to find a way to measure it, and to keep an eye on the measurement.  With debt, that measurement is usually the remaining balance.  Help your friend stay motivated to make their payments (and to feel good about paying back the dear friend who helped them out in their time of need) by providing a regular statement of their remaining balance.  Moneylender Professional can definitely help here, too, since it can track the balance, calculate the interest, and generate regular statements easily.  You can even have it send a statement to your friend’s email so there’s no postage or paper needed.

Celebrate when the loan is paid all the way off.

When your friend has completely paid off their debt, celebrate their accomplishment.  Whether it’s sharing a meal, a night out on the town, or just a high five – some clear sign that you’re proud of them for sticking to their word will send the message that you’re committed to being their friend and not their financier.  A loan will put strain on a relationship – show there’s no permanent harm to your friendship when they succeed in their repayment.

Cut your losses.

If your friend is a lost cause, financially, you’ll need to decide which is more important to you: the friendship or the money.  If you know you’re not getting the money back, and you don’t want to lose your friend over it, it’s time for an honest conversation.  Let your friend know that you are going to forgive their debt.  Tell them you understand their situation.  Tell them that their friendship is more important than money.  And if they ever ask for money in the future, don’t be bashful about reminding them what happened last time.

Having money can be tricky.  It’s important not to let your money come between you and your favorite people!