Lending Money to Friends? Here’s what you should know!

The problem with lending people money is that it’s hard to get them to pay you back – they’re not strangers who owe you interest on the amount they’ve borrowed and you’re not a bank or lending institution doing this as a business. It’s just a part of life where friends, relatives and even acquaintances borrow a few hundreds to tide them over until their next paycheck arrives. Most of us are reluctant to lend money this way, simply because very few people repay what they’ve borrowed without being asked a few times, or ever at all. However, there are times when you’re forced to give in because of the relationship you share or because you’re repaying favors that were done to you in the past. In such cases, here are a few ground rules to set for yourself to ensure that you don’t end up on the losing side:

  • Insist on being paid back: You may sound like Scrooge, but it’s your money and unless you’re asked to give it away without the promise of repayment, insist on being paid back. It’s not wrong to do so; rather, you’re entitled to it and must do it to show you have sound financial sense. Some people may not ask outright for money; instead, they may ask you to buy something that they need with the promise to pay you back later. Ask for what you’re owed before they claim ignorance of the purchase. And no matter how small the amount, prevent being taken for a ride by insisting on repayment.
  • Set a deadline for the repayment: Ask the borrower to give back your money within a certain date. If they borrow on the condition that they’ll pay you back as soon as they receive their salary, ask for your money within the 10th of the month. This way, you send out the message that you’re serious about being paid back.
  • Don’t settle for less: I had a friend (who is now barely an acquaintance) who would borrow money from me frequently and pay it back too; however, she would pay back only $90 if she borrowed $100, $45 if she borrowed $50, and so on. I had lost so much money by the time I realized what she was doing and put an end to it. The next time I asked for the exact amount, she took offense and made it seem like I was an ogre for demanding such a small amount of money. I however, put my foot down, and have never heard from her since. If you feel that people are deliberately paying you less, don’t settle for it.
  • Don’t lend large amounts: There’s a high possibility that you’re not going to get paid no matter how much you demand your money. So to prevent large losses, don’t lend large sums, especially to close friends and family members. Find polite, yet firm ways to say no.
  • Don’t charge interest: You lend money as a favor to friends, not as a money-making venture. So don’t look for a profit when they borrow from you. This is not just illegal, it also ruins your reputation and your relationships.

For the borrower, soft loans from friends and relatives are much better options than payday loans or cash advances on their credit cards; however, there’s no problem with this arrangement as long as they repay the money promptly, and repay it in FULL. However, most people don’t pay up unless they’re pressed to do so through reminders and not-so-subtle nudges and hints. They usually do come through because they’re worried about straining their relationship with you or because they know they’re going to borrow from you again. So use these two aspects to get them to pay up if nothing else works.

“Neither a borrower, nor a lender be” are wise words; however, the rules are different today – if you’re a lender, insist on being paid back, and if you’re a borrower, pay up as promised to avoid money causing rifts in your relationship.