Is it ever a good idea to lend money to a friend?
If a friend or family member is looking to borrow and you can afford to lend them the money then it will be significantly cheaper for them. But lending money does come with its risks. To keep your money (and relationship) safe, always draw up a contract. This way you both know where you stand from the start.
Things to consider when lending to friends and family:
1. Can you afford to lend money?
Without a doubt, your financial wellbeing comes first. If you’re just scraping by then lending money is not a good idea.
If you can afford it, there are a number of benefits to lending money to friends and family. As mentioned it will save them cash and, dependent on the situation, you could earn yourself a small bonus by charging your own interest rate.
2. Can they afford to pay you back?
After considering your financial situation it’s vital to consider theirs too:
- Are they working at the moment?
- How much they are earning?
- Do they have other financial commitments such as car repayments and any other current debt?
- What are their spending habits?
It’s an easy mistake to make to lend someone money who spends frivolously and won’t take the repayment seriously. As Emily found out, she lent money to close friend Ben only for him not to take the repayment seriously and spent the borrowed money on new games for his PS4 and going out partying. As a result, Emily never received her money back.
You could end up losing not only money but your friend in the process, so it’s important to ask both yourself and your friend: "why do they need the money?"
How to approach someone who owes you money
When a friend owes you money and is not living up to their side of the deal it can be tough. It’s important to not get confrontational, but first approach them with a cool manner and politely ask them if they are ready to pay you back.
Give them suggestions to pay you back in other ways – such as covering a dinner for you both. If all else fails, get it in writing.
You could feel like they’re distancing themselves from you, as Charlotte found out when their friend stopped returning her texts and calls…
How to make sure they pay you back
When it comes to making any financial decision it’s important to protect yourself with a contract. By laying the ground rules from the start, you both know where you stand. As a minimum you should outline:
- How much you will lend?
- The period over which you expect them to repay?
- How much each repayment will be?
- What happens in the case they can't afford a repayment?
Here’s what to do if you don’t get paid back
If worse comes to worst and you don’t get your money back, here's what you can do.
1. Talk to them
Try and come to an agreement. You may need to extend the repayment of the loan to a certain date to when they can pay you back.
2. Small claims court
But if all else fails, you can take them to small claims court. If the loan is less than £5,000, you can challenge the outstanding payments in court.
Like any financial decision, lending someone money should be worked out together with a written contract and clear instructions of how the repayment will work for both of you. If you don’t, you could potentially lose money and a friend in the process.
Mark joined Choose Wisely in 2015. He continues to work in close contact with the providers, brokers and journalists operating in the world of consumer credit.