When a friend comes to you for a loan, it’s easy to just say yes and begin reaching for your wallet. But a loan between friends can be dangerous—to the lender, the borrower and the friendship—which is why it should be considered carefully. Here are five questions you can ask yourself to figure out whether it’s a good idea to lend the money.
- Can you afford to loan them the money? The first question you should ask yourself, no matter how dire your friend’s situation, is whether you can afford to lend them the money. If the loan is more than 5 percent of your own savings, or if you have less than $2,500 in savings, then you should probably say no because you could be putting yourself in a riskier position by making the loan. And emergencies don’t just happen to one person at a time. Even while helping your friends you have to make sure you’re able to support yourself throughout your own emergency.
- How did they get into this position to begin with? Is it something they’re likely to repeat? Sometimes bad things happen to perfectly responsible, yet unprepared people. But sometimes, people have a tendency to make bad decisions that have the cumulative effect of them needing to borrow money. If your friend tends to make these types of mistakes repeatedly, then lending them money could be a form of enabling them—and that’s not good for you or your friend.
- How necessary is the loan? Every time you make a loan to a friend, no matter how much money you have in savings, you’re taking a risk. You’re taking the risk that you won’t get paid back and you’re taking a risk that you won’t eventually need that money yourself before it’s paid back. To decide whether those risks are worth it, you have to evaluate what the loan is going to be used for.
- What is their repayment plan? Does it seem reasonable? A loan is a loan and a gift is a gift—these terms should not be used interchangeably. If you are asked to loan someone money, you should expect to be paid back. If you expect to be paid back, you need to see their repayment plan. One that’s too aggressive is one that won’t be fulfilled and can lead to resentment.
- Is there another (possibly better) way you can help? When someone asks you for a loan, you don’t have to immediately reach into your wallet. You can find out if there are other ways to help them. A person who needs money may also be able to do some side work for you to earn the money while helping you accomplish something you’ve been putting off. Or maybe you could donate your time to them to help them save money, perhaps by babysitting their kids, fixing their car, etc., which could mean they won’t need to borrow anything after all.