Considering lending to a friend? Here’s some top do’s and don’t’s!

earn cshWhen friends or family are in trouble, it is hard to stand by and do nothing. Many people have money issues, and if you find your friend or family member also has a financial crisis, you might be considering helping them out. This is a very kind, sincere thing to do, but it can cause further problems down the line. Indeed, many relationships have broken down because of issues with repaying debt. This is why it is important to consider your options carefully:

Speak honestly

You need to address the person honestly and ensure they tell you what the money is for. If they reveal this to you, it might make you think twice about handing over any money. For instance, they may reveal they only want the money so they can afford a big holiday and their current debt doesn’t allow them to afford this, in which case you might think better of giving them the money because you know that by giving them the money, you could be sacrificing your own holiday!

Be smart and have a frank, open and honest discussion. See if there are any ways around lending directly (e.g. helping them to budget for the amount required instead of just handing cash over.)

Don’t respond to negative pressure

Don’t lend money if you feel you are being pressured to do so. If you are unable to help out your friend, stand firm and offer alternatives. It won’t be the end of the world if you say no, and it is more likely to cause problems in the long term if you agree and then feel resentment towards them.

Only lend what you can afford

If you know what the money is for, and accept it is a good enough reason to lend the money, and have the money available, make sure you can actually afford the amount they require. There is no point getting yourself into debt because you are trying to help someone else! Wonga ZA, who regularly post financial blogs on their site to help people better manage their money, suggest that you should stick with lending cash only, as it can be controlled. Don’t give a large sum just to appear generous – your finances are important, too!

Keep it professional

Wonga also suggest agreeing on how much money they’re going to borrow, as well as how and when you’ll start getting your money back. They say you should write it down and make sure you both sign it, so it’s a binding agreement.

Have a plan in place

You should ensure you have a repayment plan in place. Don’t just say ‘pay it back whenever’ because realistically, if they still haven’t paid you back in 5 years’ time, you won’t be best pleased. The Money Advice Service suggests developing a loan agreement which will state an amount you have to pay back every month. Also consider things like, are there any early repayment charges? Can they repay it all in one go for a smaller price? How much is the total loan amount? How is it to be repaid – i.e. direct debit? Cheque every three months? Cash every week?

What happens if it goes wrong?

Try and maintain communication with your friend and reason with them. They may feel embarrassed that they can’t repay you. If you shut them off, or go to court, or ignore their messages because you are hurt/angry/upset, this could damage your relationship more.

Lending to a friend is ultimately your choice, but it shouldn’t be made lightly. You may feel like you know the person, but things can be very different when money is involved. By following the steps above, you can alleviate some issues and hopefully maintain a positive friendship with your loved one.