Headed to the ATM to help out a friend down on his luck? Read this first.
When I was in my 20s and didn’t have good credit, I borrowed $400 from my best friend for a car repair. Then I took my time paying it back – years, in fact. I even took a vacation to San Francisco while I still owed her the money.
Eventually, I got my financial act together and paid her back with monthly installments through a debt repayment plan with a nonprofit credit counseling agency. By then, however, the friendship was dead, expiring with a chilly silence and no explanation. Ten years later, I was the lender, helping a friend out with $300 in travel funds when he moved to California. He paid the money back, after months of hounding, but that friendship was also ruined.
Now I’m older and wiser, with excellent credit, and I’ve learned that it’s generally not a good idea to borrow or lend money to a friend. Still, there may be times you’re tempted to run by the bank to withdraw money to help a friend in need.
Below are six signs that loaning money to a friend “might” turn out fine.
Click here to sign up for our free financial education email course.
1. You know the person well
If you’ve known someone for years – or better yet, decades – you’ve had plenty of opportunities to observe their character. If your friend has a history of responsible financial and ethical behavior, you’re still taking a risk but at least it’s a low risk.
On the other hand, it may be tempting to loan your best clubbing buddy that you met a few months ago $500 so she can get her car fixed and continue partying with you every weekend. Don’t do it. She’ll probably dance away to become a distant memory one day, just like the money you loaned her.
2. Your friend paid back an earlier loan
If you’ve loaned money to a friend before, and he paid you back on time, that’s a good sign that he’ll pay back the money you loan him again. There’s no guarantee, of course, and you’re still risking damage to the friendship if he defaults or drags his fee on repayment.
However, just like creditors lend money based on your payment history, loaning money to someone with a proven repayment track record could work out okay for both parties.
3. The borrower has a job
It may be tempting to loan your friend $1,000 to pay the rent if she lost her job, but that’s a risky loan since it’s difficult to pay back a loan when a person doesn’t have an income. You’re probably better off helping your friend in other ways, buying her groceries, for example.
You could even give your friend some money – but make the money a gift, not a loan, and mean it. Your friend will be grateful, and the gesture will help the friendship, not destroy it with resentment over a loan gone bad.
4. Your friend loaned you money in the past
This is a tough one, since lending money to a friend who loaned you money can be based more on a sense of obligation than a carefully considered loan transaction. Still, if the loan amount isn’t too large and your friend has always proved trustworthy, his or her past generosity may warrant giving your friend the benefit of the doubt on a small loan.
Just make sure you put the loan terms such as monthly payment amounts and any interest in writing so there are no friendship-wrecking misunderstandings.
5. The person expects a large amount of money soon
This one could go either way, and it’s pretty risky. For instance, let’s say your friend is broke but will receive thousands of dollars in student loans next month. That sounds like a pretty good loan bet, right? And it can be, if the person pays you back as soon as she receives the money.
But this loan transaction can also lead to trouble if your friend receives the anticipated money and then spends it on new electronics, a nicer apartment or a vacation
6. You’re an extremely forgiving person
Any time you loan money to someone, there’s a chance the person won’t pay you back. That’s why there are so many famous quotes about the dangers of loaning and borrowing money.
If you know that you can let anger and resentment go if someone fails to repay a loan due to unforeseen circumstances – or even irresponsibility on your friend’s part – you’re going to be better off (at least emotionally) in the long run if things don’t work out as planned.
Unless you’re fully prepared to forgive in a non-repayment scenario, however, hang on to your money and guide your friend towards other options such as a bank loan or credit counseling to learn better money management skills.
Published by Debt.com, LLC