Friendship Loans: Not Letting Money Affect the Relationship
People are not meant to live alone. Social gatherings and togetherness help define a life well-lived, but with relationships come empathy and obligation. Whether people like to admit it or not, they have a responsibility to those they connect with. Sure it does not typically involve a financial obligation when talking about friendship, but people want to make others happy.
The aspect of empathy plays a critical role in friendship. When a friend hurts, it is difficult not to share some of their sadness. The same can be said when a friend is struggling financially. There is an urge to make things better for loved ones, but money and friendship can often lead to strained or fractured relationships, especially when it comes to the dreaded friendship loan.
You can loan money to friends, but it is vital to establish the terms first. If neither party has a clear understanding of the expectations of the agreement, the loan can lead to disagreement, anger, and legal dispute. Before lending money to your friends, consider four things.
1. Risks and Repayment
If your friend is coming to you for a loan, the odds are they do not have decent credit for a more traditional option. As their friend, you likely have insight into some of their financial problems, and some reasons might be justifiable and in the past, making you confident in their ability to repay the loan.
However, always remember that providing a loan is a risk, and as an individual, you might not have the same avenues for loan recovery as other financial institutions. Knowing your options are limited does not mean you cannot or should not loan your friend money; it only means you need to understand repayment is not a guarantee and recovery might be more challenging.
2. Clear Terms
If the loan's repayment is crucial to your financial health, you need to treat the transaction as you would any business exchange. You should draw up a contract, stipulating clear and decisive terms. Make sure the timeline for the loan is stipulated in the agreement. Do not merely sign the document with no witnesses. Take the contract to a notary to make the exchange official. Depending on the sum, you might want to involve lawyers and accountants.
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3. Monetary Gift
The best way to avoid any problems is never to loan more than you can afford to lose. You always want your friendships to remain strong and healthy, but getting into financial arrangements tends to strain the relationships. If you view the money as a gift rather than a loan, there is no expectation of repayment, meaning no reason for challenges in the relationship. By sticking to this rule of lending only what you can afford to lose, your friends will likely only come to you for small amounts, if ever.
4. Resolution and Relationship
If you cannot afford to lose the money you lent, make sure to stick to your agreed-upon timeline. Allowing a loan to linger only contributes to tension and frustration in the relationship. Beyond straining your relationship, unresolved conflicts can contribute to stress, leading to potential health problems.
Loaning money to friends is often advised against. Still, the emotional connections to the people around you create an empathetic response, leading to you feeling a sense of obligation to loved ones. The best advice is never to loan more than you can afford to lose; that way, relationships stay intact. Do you have any advice for loaning money to friends? Leave a comment below.
When it comes to loaning money to family or close friends, first decide if it is a loan or gift. Then put it down on paper, the amount loaned, what payments are expected and what will happen if they don’t pay. In some cases, especially if it an amount that is considered a lot by the person making the loan, ask for collateral. For example: a neighbor we have known for 20 years needed money ($1000) for medical expenses. He lived in a trailer that was paid for. We asked him for the title of the trailer and had it assigned to us. If he didn’t pay the money back based on the written terms, we could sell his trailer to recoup the money. He paid us back quicker than we expected and we gave him back his title with no liens and he’s used us as a credit reference since then. We also loaned a family member $100. She had borrowed before and not paid us any money. She gave us a ring she said was worth more than that. When she paid us back, we gave her the ring. The ring appraised at $1000 but we never told her that. One evening a close friend of one of our grown children called and said she was broke, her child was sick and she needed $400 desperately. She came to our house and I wrote her a check which she cashed the next day with no promise of repayment or terms. We never saw her or heard from her for years after this “loan”. Recently, we attended her funeral. She died of a drug overdose. I’ll never do that again.