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 http://www.prosper.com/ 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.