If your friend is in a sticky spot, helping them out could seem like the right thing to do. But before you agree to hand over any money, there are several things you should consider. Here are some tips for lending money that will make it easier for both of you.
Lending money to friends: The do’s
The following are some rules to help make lending money to friends easier.
1. Agree on the loan terms
Make sure you and your friend agree on the amount, the repayment date, and the interest rate before you lend money. Having a formal contract drawn up is unnecessary, but it’s a good idea to send an email outlining particulars if there is any chance of this friendship ending.
If you don’t have an agreement, you could find that your friend isn’t inclined to pay back the loan or that they only repay small amounts.
2. Write up a contract
After you and your friend agree to the terms, it might be helpful for one or both of you to draw up a formal contract. This could include information such as the amount of money, the interest rate, and repayment details (for example, month by month, end of year). This will help to avoid any issues if you and your friend stop talking to each other for any reason.
3. Charge interest
If you are loaning money to your friend, it’s a good idea to charge interest on the loan. Charging interest lets both of you know that this is a business transaction and not just a favor.
By charging interest, even if it’s just one percent per year, you are less likely to be out of pocket when the loan is paid back.
Lending money to friends: The don’ts
The following are some rules for lending money that you should avoid.
1. Lend without a backup plan
If you aren’t confident about your ability to keep up with commitments, it is best not to lend money. If the worst happens and they can no longer afford repayments, be aware that this could harm your own financial situation because friends should only ever loan if both parties are financially stable enough for such a commitment.
2. Assume they can repay you (without proof)
Another lending mistake is to loan money for no reason other than because you’re friends. This can be a dangerous step if you are not prepared to follow through with the repayment process.
For example, if your friend doesn’t have access to money or is struggling financially, that doesn’t necessarily mean they will repay you.
3. Lend to someone without a stable income
To avoid lending money that your friend will struggle to repay, it’s a good idea to look into their financial situation before offering a loan.
For example, does your friend have a job? If so, how much do they earn? Knowing this information will help you determine whether or not they can repay the loan.
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