22 February 2024

What to consider before you lend money to friends

By ruiiid5

There are many reasons why a person looking to borrow money will approach a friend or a family member first, including a desire to avoid payday lenders or having a poor credit rating. If you have been approached by a friend who would like to borrow some money from you, here are some things to keep in mind before agreeing.

Image credit

Can you afford to lend money to a friend?

While you might be able to afford to help out a friend in need now, it is worth pausing to determine whether this would still be the case if your personal financial circumstances were to change. Don’t put your financial security at risk unnecessarily and only lend if you are confident that it is the right decision.

Are you confident your friend will pay you back?

Consider whether your friend or family member has the means to repay the money within a time frame that suits you both. It is important to establish that the money you are lending them is not a gift and that you do expect to receive it back within a specified period of time.

It may be beneficial to sit down with your friend and use a tool like the Money Helper Budget Planner to ensure that lending the money is the right decision for both of you.

Will your relationship change as a consequence of lending money?

Numerous issues can arise when finances are brought into a personal friendship, including feelings of resentment and altered power dynamics. Before lending money to a friend or a family member, think very carefully about whether your relationship is strong enough to survive these potential challenges.

Image credit

Consider using a loan agreement

A loan agreement is a written document which clearly sets out the amount of money being borrowed and the timeframe in which the money should be repaid. More information about loan agreements can be found at https://www.parachutelaw.co.uk/loan-agreement, including associated fees with drafting and registering professional legal documents to protect your money.

Although broaching the topic of signing a loan agreement may be a bit awkward, it is the best way to ensure that all parties understand the conditions of the agreement. If your friend or family member isn’t willing to go down this route, it is worth considering why this is the case and thinking very carefully about whether lending the money is a sensible decision.