By Bizna Brand Analyst
Deciding whether to help a friend or family member financially can be tricky, especially if you are worried about whether they can afford to repay it. Here is how to protect your money when a friend in need comes calling.
Lending money to a friend can often seem like a good way to help out. However, although you may want to help them, you need to put your financial well-being first. If things went wrong, you could end up losing more than just your money.
So, if you are asked for a loan by a friend, you should seriously consider the following before making a decision:
Can you afford it?
Decide whether you can afford to part with the cash for a while because the reality is you might not get the money back for months to come. Ask yourself how you would deal with an unexpected expense. Would you be able to cover it with the money you have left or would you be forced to borrow it yourself?
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Additionally, if you are working towards a financial goal such as clearing your debts, or saving for a house you should consider how it far it will set you back.
Can they afford it?
Why do they need it? If they are in a serious problem or emergency, lending isn’t bad. If they are reluctant to say why they need to borrow, remember it is your money and you are well within your rights to ask what it will be used for.
Decide whether the friend will be able to repay you and if you trust them enough to do this without having to chase them for the money.
You should consider:
- If they are working
- How much they earn
- What other financial commitments do they have
- How effectively they have managed their money in the past
If they do not have much money coming in and are already struggling to pay their bills, another loan might not be what they need. If others have lent them money and struggled to get it back, you may want to be more cautious. You could end up losing your money and your friend as they are unable to pay.
Will you lose out by lending?
If you take money out of your savings or sacrifice something you really need, you would technically lose money by lending to your friend.
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Although it can seem harsh if you do not charge them any interest you will essentially be paying for the privilege of lending your own money.
Consider asking for an amount equivalent to that which you would have earned if the money remained in your savings account or investment.
Protect yourself
If you decide to lend the money, there are a number of ways you can protect yourself:
- Set the terms
- Before you lend the money make sure you agree exactly:
- How much you will lend
- The interest rate
- The term
- How much they will be expected to repay each month
- Have a written agreement witnessed by a third party
It is essential that you are both aware of all of these conditions before any money is exchanged.
Record repayments
Once the loan is active, you will need to monitor the repayments and keep a record of when you have been paid.
Doing this will ensure that there are no disagreements as to when the loan has been repaid or what is still left to be paid.
What if things go wrong?
If your friend struggles to meet the repayments as agreed, encourage them to speak to you about the problem. Try to agree with them on the best course of action to repay their debts. But don’t be lied to.
It may be that you have to extend the term of the loan so they can spread out their repayments, or possibly offer them a “payment holiday” if their problems are only temporary.
However, if they refuse to repay and you need to get your money back, you may need to go make them do it the hard way. Or just count your losses and cut the friendship.