should I lend my friend money
How to protect yourself when lending money to a friend?
Lending money to people you know has the potential to lead to problems.
Families can be left in tatters, marriages can end, and life-long friendships can be ruined forever. It’s awkward and uncomfortable if they can’t pay you back, and that’s not even considering the actual debt. You can never predict and prepare for everything that could go wrong, creating financial risk for everyone involved. The new situation created by lending becomes far greater than the money issue itself.
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How to protect yourself when lending money to a friend?
At The Real Debt Guy, we have developed our Lending Code that you can follow to prevent these situations from arising. There are three essential rules to follow:
- Do not lend money to anyone who keeps asking to borrow money
- Lend only what you can afford to lose
- Do not take out borrowing for someone else
We'll guide you through each of these rules below...
How to deal with someone who keeps asking to borrow money?
RULE 1 - Do not lend money to anyone who keeps asking to borrow money.
If someone always needs to borrow money, the root cause of the problem is likely the way they are spending their money. People who always need to borrow money often spend beyond their means. Take Rich, for example; in our article, ‘How do I start controlling my spending?’, he was trapped in a cycle of credit card debt, spending wildly beyond his means. The last thing he needed was a friendly handout from one of his friends to feed his problem. It would only have added more debt and more problems. You might think you are doing a good thing as a friend, but how is that person expected to pay you back?
If you lend it, you may find that they continue to ask you for money whenever they need to borrow. The minute you lend that person money, you become an option. Be prepared to become their go-to person again and again. You’ve essentially become their credit line.
Just say no! It might feel awkward at the time you refuse to lend the money, but this is nothing in comparison to what could happen. If you refuse to lend someone money in this situation, encourage them to find a way that doesn’t mean borrowing more.
What is the old saying about lending money?
RULE 2 - Lend only what you can afford to lose.
If you are seriously considering lending someone money, only ever do it if you can survive without getting that money back. There is a high risk you won’t see that money again, which leaves you financially vulnerable. It's a gamble, and the number one rule of gambling is never gamble what you can't afford to lose.
The same rule applies here. Once the money changes hands, it’s out of your control. If you need that money back, it should be a no-go in the first place.
Never lend money that can put you financially at risk. It makes no sense for you both to be struggling. It also makes no sense to put that strain on your relationship. If we’re talking about a partner or a close friend, you must put your emotional attachment to one side. The old saying goes, ‘You’ve got to be cruel to be kind'.
Can I take out a loan for someone else?
RULE 3 - Do not take out borrowing for someone else.
This rule should never be broken. It is far too important and carries the most significant financial and emotional risk.
Here’s a story of a young couple, Matthew and Sarah...
Matthew had a lifelong dream of starting his own business but didn’t have the finances to do so and was already in debt. Having complete faith in her partner, Sarah took out a £15k loan for him. This money would clear his debt and leave him with enough to get his business up and running. However, the relationship was only six months old.
Sarah and Matthew split up shortly after the loan was taken out. Then Matthew seemed to disappear off the face of the earth. With only a handful of payments made, Sarah was left with a loan in her name.
Sarah didn’t even see the money, yet now she has to pay back every penny.
Situations aren’t always this severe, but it shows what is at stake. The loan is in your name; you owe the money.
If you’re taking out a loan on behalf of someone else, stop and ask yourself why. The person asking for the money cannot afford whatever they need the money for, which is the problem. Borrowing more money for someone will not necessarily fix their issues. It will create new ones for them and now also for you.
Borrowing & broken relationships
Combining relationships and borrowing money comes with huge risks. When you break up with a partner or fall out with a friend or family member, it’s usually because something has caused the relationship to break down. The trust is no longer there. This is a big thing to consider if you’re still considering borrowing on behalf of someone else. If anything were to go wrong in your relationship, you would be relying on them to ‘do the right thing’. Could you say with 100% confidence that they would?
If the answer is no, you’re putting yourself at risk. If the answer to the question is yes, you need to know that relationships can change, and so can people. The company you are borrowing money from only knows you. They don’t know you are borrowing it for someone else. It is only you they may take action against when the payments default. Only you may be at risk of a CCJ should the debt not be properly managed.
Relationships can also break down in business. If you’re taking out a loan to help your partner or a friend start a business, treat it like you are an investor. Ensure that you own part of the business and that the loan payments are set up to be paid monthly. Most importantly, make sure you are legally protected should anything go wrong. Business with friends and family is still business.
Don’t leave anything to chance.
Remember to read The Real Debt Guy's final thoughts below!
