Questions To Ask Yourself Before Lending Money To A Friend. In today’s blog post I share 10 questions that you should ask yourself before you decide to loan money to a friend. Answering these questions honestly will save you a lot of money and will also probably save your relationship.
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Questions To Ask Yourself Before Lending Money To A Friend
There’s nothing worse than loaning money to a friend and having to chase them to get your money back. Money has the power to sever even the strongest of relationships, so it’s important to really count the cost before parting with your money.
In today’s blog post I share 10 questions that you should ask yourself before you decide to loan money to a friend. Answering these questions honestly will save you a lot of money and will also probably save your relationship.
1. Can I Afford It?
The answer to this question will be a clear indicator of the course of action you should take. Can you afford to part with that money? If you have a budget in place this will be much easier to determine. If you don’t have one in place you can grab my budget template here.
If borrowing your friend money will leave you short or unable to meet your own financial commitments and obligations then just say no. Your friend should understand that you would help if you could so don’t feel bad if you are unable to help this time.
2. Why Do They Need The Load?
There’s nothing wrong with a friend asking you to borrow money if it’s an urgent need, but some loans may be requested for things that are not so important. Knowing why your friend needs the loan will help you make a more informed decision as to whether you can and will help.
Let’s take a look at a fictional scenario. Your friend hasn’t been paid by their employer because of an error with payroll and has been advised that the money will be paid a week from the date. Your friend asks for a loan to tie them over until the next week to cover living expenses. In this scenario, I would be inclined to loan my friend the money. A scenario that I probably wouldn’t feel obliged to loan my friend the money is to buy a pair of shoes that are on offer. Just because it’s a great deal, it doesn’t mean that you have to buy it – especially not with my money.
3. Will This Make Our Relationship Awkward?
This is an important question to ask yourself. As mentioned previously, money really can make or break a relationship so consider the impact that this loan will have. You know your temperament and what makes you tick. Will you be comfortable knowing your friend owes you money but still has to live their lives between the loan date and repayment? Will you be salty seeing every new picture they post on Instagram before they repay your money, thinking how dare they live their life when they owe me money? Be honest and consider if you can really handle what comes with a friend owing you money.
4. Is This An Amount You Can Afford To Lose?
If your friend doesn’t repay the amount borrowed on or by the agreed date, what impact will this have on your own personal finances? Can you afford to lose that money? Life happens and things don’t always go according to plan. Your friend could have the best of intentions and really have every desire to pay you back, but this for whatever reason, may not be possible. If this happens, can you afford to lose that money?
5. Which Will Affect Your Friendship More: Saying No Or Saying Yes?
Some people find it hard to say no. I definitely fall into that category of people. I don’t like offending people or letting them down, so in the past, I’ve agreed to things to my own detriment. As heartless as this may sound, you need to do what is best for you. Ask yourself, which scenario is better. Saying yes to this friend and keeping the friendship sweet because they’ve got what they want. Or saying no and disappointing your friend because you’re unable to facilitate their request. Consider the impact that both choices will have on your relationship and make the decision that will allow you to sleep peacefully at night.
6. What’s The Worst-Case Scenario?
Playing out the different scenarios in your head can help you make a more informed decision as to whether or not to go ahead with the loan. For example, you loan them the money and they don’t pay you back – ever. They block your phone number and block you on every social media platform. What impact will this have on your financial situation? Think of all the possible worse case outcomes that could potentially occur from this loan. Is it worth losing a friend over money?
Now it’s highly unlikely that the worst-case scenario will play out, but considering this question will at least help you think more about a potentially unfavourable outcome that you could encounter and be a little prepared for all eventualities. Let’s be honest, I’ve watched enough episodes of Judge Rinder to know that money can cause friendships to breakdown so it’s important to count the costs before lending money to a friend.
7. What Other Debts Does Your Friend Have?
If you are just one in a long line of people that your friend owes money to, then you may not be the first person on their list of creditors to repay. If your friend is struggling financially, perhaps have an open non-judgemental conversation with them to find out what is really going on and why they are in so much debt. There are debt relief charities like Step Change that offer help and support in getting out of debt. When someone is in a lot of debt, you don’t want to make it worse by helping them to dig a deeper hole.
8. How Formal Should The Arrangement Be?
It may seem a bit extreme to draw up a contract for your friend to sign before issuing the loan, however, if the money you are borrowing your friend is money that you know you can’t afford to lose, then it’s important to protect yourself against uncertainties. On the other hand, you could be borrowing them the money without the expectation of getting back. Receiving the repayment would be an added bonus in which case you may not want to formalise the arrangement. Either way, give this some thought before parting with your money.
9. Should You Charge Interest?
Now this isn’t something I would personally ever do to a friend as I would assume that they are asking for the loan as the last resort. The last thing I would want to do is profit off of my friends’ misfortune. However, I appreciate that we all don’t think in the same way. The money you are lending to a friend could be used for an investment for yourself which would give the money the opportunity to grow. Or you may just want to charge for your services just as they would be charged if they took out the loan from a bank.
10. Is This A Regular Occurrence?
Is this a one-off loan request, or are they back every other month after payday asking for a loan? The patterns of behaviour and the frequency of these loan requests should help you decide whether or not to lend them the money. If they do keep asking you for money then it’s worth having a conversation with them about their financial situation and seeing what you can do as a friend to help them without giving them the money.
So there you have it, we’ve come to the end of my list of 10 questions to ask yourself before lending money to a friend. I would be interested to know if you would ever lend money to friends or have you ever borrowed money from a friend. What has your experience been and would you do it again? Share in the comments section below.
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