Are you thinking of lending money to a friend?

Lending money to people who you don’t necessarily know that well is a big no no, however when it comes to friends and family asking you for financial help, then there’s no right or wrong answer of what you should do since we have some friends who we think of as family and our natural instinct is to help. Before you make any rash decisions, I’ve come up with five important points to consider if you are thinking of lending out big money!

Can I afford it?

The first and most important point you need to consider before lending out a large amount of money is will you be putting yourself in financial hardship? As I mentioned, it is our natural instinct to help out, but you simply can’t put yourself in financial difficulty to do so. If this would be the case then why not try helping them out in other ways, like offering to babysit to minimise child care costs or giving them lifts places to cut down on transport costs?

Can THEY afford it?

Think about whether or not they can realistically pay you back in full. If you know deep down there is no signs to suggest they will ever be in a position to pay you back in full, you may again want to reconsider. If you have no doubt that they will then you can set up some terms and conditions. Give them a chance to pay back in instalments or when their pay is deposited or however you think is the best way to do it.

What will I do if the borrower can’t pay?

You should consider what will happen if your friend can’t pay you back for whatever reason. You may have full confidence that this won’t happen but it should definitely be taken into consideration. Would it put a strain on your relationship? The last thing you want to do is end up falling out over money, however it’s these situations that can put strains on friendships!

What will the money be used for?

Even if you have the money to spend, you don’t want to enable bad habits! Therefore, you should only lend money if it’s going towards a specific goal or purpose that you understand and feel comfortable with. If you really don’t approve with how they will be spending your money, then don’t extend your money to them!

Get everything it writing

If you’re going to be going down the loan route, guard against any potential disagreements by getting the terms of the loan in writing! If necessary, get down the amount, interest rate, length of the loan and the repayment schedule! Also keep a note of whenever the amount is paid back!

I hope this has helped some of you who are considering lending money out to family and friends but are feeling apprehensive about doing so!