If you’ve ever loaned money to a friend, the following scenario might sound familiar. Your friend is low on cash this month, so you lend them $1,000, thinking they’ll repay you promptly. A month passes by, and you see them at a restaurant ordering wine or wearing a shirt you’ve never seen before.
Pretty soon, you start going down a rabbit hole, scrolling through social media and wondering how they can afford to go on a trip or purchase a TV when they haven’t paid you back. That’s certainly less-than-helpful for the intimacy of that friendship.
Below, we asked certified financial therapists everything you need to know about lending money to friends and how to prevent this from ruining your relationship.
Can you afford to lose the money?
The issue: Lending money to a friend comes with the possibility of not getting it back. Let’s say you loan them $1,000 and then your car breaks down or you need to take your dog to the vet.
“If you’re putting yourself in an unsustainable place financially for the sake of helping your friend, you’re not doing yourself any favors,” Michael Lombard, a certified financial therapist, told HuffPost.
The solution: “The No. 1 thing is to look at your own finances first,” Erika Wasserman, a certified financial therapist and author of ”Conversations with Your Financial Therapist,” told HuffPost. “If you don’t have the money, don’t give it.” Or if you’re tossing and turning over lending somebody $5,000, that wasn’t the right decision because now it’s impacting your health.
If you can afford to take the loss, both experts suggested giving the money as a gift. “Setting that expectation for yourself can help guard against any resentment or bitterness that could develop if things go sideways,” Lombard said.
Wasserman agreed, saying, “if the money is a gift, give it willingly with your full heart. That means when you see that person at a nice dinner or at a concert, you can’t be upset.”
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Are you keeping loved ones in the dark?
The issue: “I hear this question often that people don’t know how to talk about money or ask people, even their romantic partner, about their relationship with money,” Wasserman said. As a result, people can be secretive to avoid arguing or having awkward conversations about money.
Maybe your partner doesn’t get along with your friend. Or your friend has a habit of asking for money and not paying it back. Instead of your partner thinking it’s honorable that you want to help your friend, loaning them money can lead to resentment or a loss of trust if you do it behind your partner’s back, she added.
The solution: Her advice was to start these discussions early using these conversation cards. For example, you can say to your partner, “How would you feel if someone wanted to borrow $1,000? Would we expect them to repay the loan, or would this be a gift?”
“Sometimes, talking about money in a hypothetical way helps you and your partner understand the ground rules and the thought behind them,” she said. She also recommended creating boundaries concerning the amount and the intended recipients. For instance, if the amount is less than $50, you and your partner can give to whoever you want, but if it’s more than that, you agree to have a discussion.
In addition, if it’s customary in your culture or community to support people financially, talk to your partner and plan for it by creating a giving fund, she said. For example, you can set aside $100 a month or $1,500 a year that you give to family members or friends.
Are you expecting to be repaid?
The issue: If your friend doesn’t repay the loan as you anticipated, it can put a strain on your relationship. “You’re emotionally invested in that person,” Wasserman said. “You trust that person to pay you back, and when they don’t, the trust is broken.”
It might be tempting to ignore a missed payment. But that can lead to a pattern where your friend assumes that you don’t need or expect to be repaid.
The solution: One way to protect your investment is to create a written agreement. “Writing it out isn’t an admission that you don’t trust your friend, but it’s a way to protect both of you and lay out the expectations clearly and for reference later on,” Lombard said.
The agreement should include the total amount you are lending, the repayment schedule and how you want to be paid back. “It is probably a good idea to avoid including interest or if you do, to make it as little as possible,” he said, adding, “it might do more harm to the friendship.”
However, if you expect your friend to pay you back, there’s no amount that’s too small for a contract. “Have it written, and have it notarized, if possible,” Wasserman said. It’s also wise to include the purpose of the funds and what happens if your friend misses a payment.
“This is where it gets tricky because what can you realistically do with a friend, and you also have to implement this,” she said. If your friend defaults on a payment, her advice was to call them and discuss whether you need to adjust the payment plan.
Are you enabling their spending habits?
The issue: “It’s one thing if a friend is looking to borrow money to cover an emergency,” Lombard said. “Needing to borrow the money due to continuous, unsustainable, problematic spending patterns is another.”
An emergency might be that a friend is going through cancer treatment and needs help with grocery bills. Conversely, you might have a friend who consistently breaks their budget and expects you to make up the shortfall. “Once you start giving people money, they know that you’re a source to go to if they lose a job or their roof has a leak,” Wasserman said.
The solution: One way to manage repeat requests is to set clear expectations about how much you’re willing to loan them, she said. In the case of rent money, for example, you can ask if they want the loan upfront or over several months.
Another option is what Wasserman called “sweat equity.” For example, you give your friend $500 and, in exchange, they paint your living room or repair your fence. When one of her clients started using sweat equity, fewer people were coming to her for money because she expected something in return. “If you’re always known to give, you might be getting taken advantage of,” she said.
You decide to loan them money. Here’s how to protect your friendship.
“Helping a friend with their financial needs can be incredibly fulfilling,” Lombard said. The first step is to sit down with them and talk about the loan.
“Make the conversation as comfortable as possible, meaning don’t do it at a party and don’t do it when alcohol is involved,” Wasserman said. She suggested the following questions:
- What will you be using the money for?
- What alternatives have you tried, such as getting a loan?
- Has someone loaned you money in the past?
- Were you able to repay them?
- Will loaning you money impact our relationship?
“If they get uncomfortable with these questions, that should be a red flag,” she said. “This is your money at the end of the day. If they’re bold or brave enough to ask you for money, they should be transparent about it.”
Keep in mind that lending money isn’t your only option for easing their financial difficulties. Here’s where you can get creative by exploring low-cost options like cooking them a meal or mowing their lawn. Or if your friend needs money to fix their car, you could drive them to appointments, pay for a ride-hailing service, locate a shuttle service in the community, or offer to call about an auto loan and arrange a new payment plan.
You can say no without ruining your friendship.
Once you’ve considered your financial abilities and boundaries, it may not be the right time for you to be lending money. One way to decline a request is to talk to your friend about your financial goals. Wasserman suggested saying, “’I’m paying off my student loan debt right now’ or ‘I’m saving for a house that we’re really close to buying and I’m focused on that.’”
Lombard agreed, saying that it’s best to be kind yet firm. He recommended saying, “I care about you, but I’m not in a position to lend you money right now.”
Another possibility is that you do have extra money, but perhaps your friend isn’t a wise investment for your financial future. In this case, it’s okay to say no. “You may have to sit with feelings of guilt about not wanting to or being able to lend money to your friend,” Lombard said.
Wasserman’s advice was to look at your friend like you would a business and ask yourself if they’re trustworthy and reputable. “You don’t want a loan to negatively impact your finances, your credit score and your future goals,” she said. “If you’re constantly giving away money, then you’re not building yourself.”