Saturday, December 1, 2007

Should I Loan Money to a Friend?

There is no easy answer to this question. In general, the Armchair Fiduciary's opinion is that you should not, especially if this is an emergency loan to keep someone afloat. Instead suggest to your friend that they go to and try to get a loan there. Prosper is a neat site where anybody can borrow or lend. The reason I would not make an "emergency" loan is simple. If your friend needs such a loan they have not managed their finances well so far and you should not expect that to change overnight. Indeed, all that is likely to end up happening is that you will lose your money and the friendship will suffer as a result. If they go to Prosper, the market will set a price that is fair for their loan and then deal with collecting on the loan (instead of you). You should not feel guilty saying "No," to an emergeny request like this, especially when you offer a helpful solution like Prosper instead. Indeed, your friend has overstepped his bounds in this request and saying no is merely restoring balance to your relationship and making sure the friendship will remain intact in the future.

The one time I might conisder making a loan to a friend is if they have a very well thought out pre-planned business venture. Even in this case be sure there is a legal document verifying the amount of the loan, the terms, and the length of the loan. Many budding entreprenuers have needed capital to get started and I view this as a legitmate request. Be sure to see the business plan laid out on paper and use common sense; don't support a venture you don't think will work.

Have a different opinion? Hit me in the comments.


One 2 One Lending said...

Question: A good friend of mine is in a tight spot financially. I'd like to help her out, but I'm worried that lending her money might sour the friendship.

Answer: Adding money issues to a friendship can result in an explosive situation. The first thing you need to do is determine why your friend is having financial problems. Is this a temporary state, or does your friend always seem to be struggling? If financial panic is a recurring theme, you need to understand that in most cases the problem runs deeper than a lack of funds. Sometimes people overspend to assuage feelings of inferiority or inadequacy. Or they run up debts trying to find happiness through expensive possessions. Others are never inclined to set aside money for unexpected expenses and are consistently flattened by them. Unaware of the true reason for their financial irresponsibility, people like this usually have difficulty changing their fiscal habits.

If your friend is always experiencing financial problems, any money you give them will just serve as a Band-Aid, and sooner or later your friend will be in dire straits again.

Ask yourself: Can I afford the loan? What would happen if your friend never paid me back? How would you feel? If you cannot afford it, or if you are not willing to relinquish your hold on the money, don't make a loan. On the other hand, if your friend is ordinarily financially responsible and you are sure you won't need the money soon, draw up a loan agreement detailing how much you are lending, when exactly your friend will repay you, and whether both of you would feel better if the loan had interest.

One 2 One Lending provides the tools to “Get it in Writing.” The AgreementBuilder will walk you through step by step in creating a promissory note and loan schedule. This way your money will help not only your friend and it won't destroy the friendship.

Jody said...

I found this topic while doing a search on how to deal with trouble in a friendly relationship, related to money.

First, I suppose I should say that, as a rule, I don't loan money to friends or family. I gift money, where appropriate. But I don't loan it. I know all too well that can sour a relationship.

But recently, I pre-paid for a service both my friend and I used. He was supposed to pay me back, and he is an honest, financially-responsible fellow, by all accounts. As such, I didn't push the issue right away (didn't care...didn't think about it, really). He was the one who eventually insisted that I tell him what his share was and how to best pay me. (Although it was paid for long in advance, I'm talking about a span of few days between using the service, and me giving him the final tally.)

That was a month ago.

For all intents and purposes, that's the last I heard from him. No...I have "heard from him". But it's only been brief "how are you" kinds of comments. Not too long ago, I left him a voicemail about two social engagements, and he never returned my call. (Something he's never done before. Usually he replies right away.) In disbelief, I called his cellular number (something I try only to do if it's urgent) and asked if he'd received my message a day or two before. When he replied, "Yes," I almost didn't know what to say. I think I just said, "Oh..." with probably obvious disappointment in my voice. (I mean, I understand it means he did get my message and wasn't interested in either event, or even in letting me know he wasn't interested.)

Wait...he did call a few times about two weeks ago, all friendly and chatty again. And I reciprocated. But, since then, BAM! ...Virtually nothing.

He contacted me recently, clearly fishing for information about a situation that's going on with a mutual friend. When I (respectfully) couldn't give him any details, he ended the conversation abruptly. That was so weird, I got the impression he was almost angry with me. I even got the vibe he would uninvite me to his upcoming party. Guess what. The next day, he did...saying it had been cancelled. (Okay...maybe it was cancelled. But it sure felt like an "unvitation.")

So, I'm left wondering. Is he treating me this way in some sort of transference ploy, because money's suddenly a bit tight? That's the only thing that makes any sense. What else could it be? We are (were) terrific friends...oh so close. Talked every few days, sometimes for an hour or more, and exchanged emails and texts regularly.

I know he's going through a bit of a tricky time right now, but he's always been so proud of all his savings and investments. Surely he's not penniless? And if he was, couldn't he just tell me? He knows I'm generous almost to a fault. And one thing everyone knows about me is, I don't "judge". People go through rough patches. It's nothing to be ashamed about. Everyone has gone/will go through a rough bit, in life.

I don't even care about the money (<$1,000). I'm happy to say, "Forget it. It's my gift to you."

But now I'm not even sure if I want to "save" the friendship...if he's going to treat me this way. (Yeah...I'm quite hurt by all this. Writing about it is rather cathartic.)

Still, it sure seems like this defacto loan will mean the end of the friendship, in one way or another. It may already have.

With scant few exceptions, I would add my voice to the chorus that warns, "Don't loan money to friends." Gift them money, if you can afford to and the situation warrants it. But don't expect them to pay it back. Assume you'll never see that money again, and be happy to have given a monetary gift to someone who will appreciate it.