What Should I Do If A Friend Asks For Money?

It’s an awkward situation that many of us have faced before. A close friend comes to you in a difficult financial bind and asks to borrow some cash. On one hand, you want to be a good friend and help them out in their time of need. But on the other hand, lending money, even to those closest to you, can seriously risk and complicate the friendship.

So what’s the right way to handle it when a friend needs to borrow money? There’s no perfect one-size-fits-all answer, as every situation is different. But here are some important tips on how to carefully navigate lending money to a friend.

Don’t Feel Obligated

First and foremost, you should never feel obligated or pressured to lend money to anyone, even your closest friends and family members. Lending cash always carries risks like not getting repaid on time, dealing with excuses about missed payments, and potentially damaging or losing the valuable friendship if things go sour over the debt.

Never feel guilty about saying no if you are not fully comfortable with the idea of lending. Protecting your personal finances and limiting risks has to take priority over keeping up expectations. A true friend should understand.

Ask What It’s For And How Much

If you are open to potentially lending your friend money, you’ll want to ask them for complete transparency about exactly what the loan is for and how much they need. A temporary shortfall to pay rent, cover urgent utilities, or handle emergency repairs or healthcare costs are generally more understandable situations to need a short-term loan.

However, if they need a larger sum to pay down huge credit card debts, fund an expensive vacation, purchase a new car or other wants rather than needs, that should raise red flags about whether a loan is appropriate. Knowing the full purpose and amount can help you decide if it’s a legitimate need within reason for you to lend for.

Discuss Repayment Terms Upfront

If you decide to move forward with lending your friend money, it’s absolutely critical that you both clearly discuss and agree on repayment terms and a schedule upfront before any cash is handed over. When exactly does your friend intend to pay it back – weekly installments, monthly payments, or one lump sum? What amount can they realistically afford for payments?

Setting clear upfront terms and sticking to them avoids any potential misunderstandings or disagreements later on about the repayment process. Even small, seemingly casual loans between friends should have an official agreement discussed in detail.  

Put The Terms In Writing

To make it official and avoid a “they said, I said” situation later, it’s wise to put the loan amount, repayment terms and schedule that you both agreed on in writing and have you both sign and date the agreement. This simple contract between friends makes it an official arrangement, not just a casual verbal promise.

It may seem overly formal, but getting the terms in writing protects both parties and Ensures you’re both crystal clear on the details and committed to it. It’s much harder to back out or accuse  the other of being unfair if you have a signed agreement to refer back to.

Attach Reasonable Consequences

While never an easy conversation, it’s probably also a good idea to discuss and agree on what reasonable consequences for actions could be taken if your friend misses multiple scheduled payments or stops repaying altogether without communication.  

Potential consequences to agree on could include cutting off any future lending, demanding the full remaining balance immediately, using a mediation service to resolve it officially, or even pursuing legal action in small claims court as an absolute last resort if it’s a larger sum of money.

Sadly, many friendships have been irreparably damaged or ruined over unpaid personal loans between friends. Having clear, reasonable consequences agreed upfront, even if they’re difficult to discuss, can help avoid things getting to that point. But you both have to be on the same page and willing to follow through.

Only Lend What You Can Afford To Lose

One of the most common mistakes people make when lending money to friends or family is giving more than they are truly financially comfortable with or could afford to potentially never get back. It’s easy to get caught up in the emotion of wanting to help out your friend, while ignoring financial realities.

Be crystal clear about your own limits and boundaries from the start. Only lend money that you have room for in your own budget, that wouldn’t put you in a tough financial spot yourself if your friend defaulted on repaying it for whatever reason. It may be difficult, but you have to be firm about only helping within your means.

Consider Gifting Or Alternative Help

If the amount your friend needs is relatively small, like a few hundred dollars, an alternative to consider is to simply gift them that money with no repayment expectations rather than dealing with a formal loan situation between friends. While not ideal if you need that money yourself, a no-strings-attached gift could be the easier solution.

You could also explore other ways to try helping your friend through tough times that don’t involve direct lending of cash. Whether it’s giving them some groceries, helping them find a job, letting them borrow household items, or connecting them to community financial resources, there are other options to assist friends when they’re broke besides loaning them money.

Ultimately, you have to use your best judgment based on the specific circumstances, amounts needed, and factors like your friend’s history of financial responsibility and repaying other debts on time. Mixing money situations with personal friendships is always a delicate balance.

Setting clear boundaries, getting everything in writing, and Ensuring you both have the same expectations and are 1000% on the same page about the loan and repayment terms is crucial. By carefully thinking through all aspects, you have a much better chance of helping your friend while keeping the friendship intact.