Personal Finance Advice

If you have ever been in a situation where a friend of yours has financial problems and turns to you for a loan you already know what an awkward situation this can be. Even if you have the money available to lend, you may not be comfortable with turning a friendship into a financial relationship by lending money to your friend. On the other hand, since the other person is your friend you may not feel comfortable with refusing a loan if you have the money. It’s a tricky situation.

What do you do when a friend approaches you to ask for a loan? No matter what the monetary amount, it’s still a potentially delicate situation. More than one friendship has been ruined by money issues, and if you’re not careful then your friendship may follow a similar pattern. No matter if you decide to lend the money or not, approach this situation delicately.

You have a few different options when a friend asks you for a loan:

Lend the money. If you decide to lend the money to your friend, only do so if you don’t need the money for yourself. In other words, don’t lend next month’s rent payment in anticipation of a prompt payback from your friend. You should also make it a formal agreement. Don’t allow a handshake and a vague promise of payback to be sufficient. Instead, write out an agreement and have your friend sign it. Have specifications in place that state what happens if your friend makes late payments.

Give the money. Instead of lending the money, and if you have the funds to spare, you may opt to simply give your friend the money. Keep in mind that gifting over certain monetary amounts may result in some tax issues, but if you are merely lending a couple hundred dollars then this isn’t really an issue. The benefit of giving a friend money instead of lending it is that there is no awkward shift in power between you and your friend, although in order to really make this situation work you need to truly mean it when you say it’s a gift and not a loan. Don’t demand repayment a few months down the road if you once said there wouldn’t be a repayment required.

Don’t lend or give the money. If you aren’t going to lend the money to your friend, try to be as tactful as possible. Don’t lecture your friend about money management or feel as though your friend deserves a detailed explanation of why you can’t or won’t lend the money. A simple, “I’m sorry, but I can’t lend you the money” is sufficient.