An article by BudgetQueen

At some point in our lives, we will borrow money. It could be from the bank, from our parents, or even from a friend. This could be anything from going to school, to buying a house, or even help paying bills. Sometimes we are extremely grateful. Most times we pay it back.

At other points in our lives we will be compelled to loan another person money. On one hand you could be helping him or her tremendously, and it his can bring you closer. However, it can also ruin your friendship or relationship forever.

There are very simple things to remember to make this a positive experience.

Do not act as if it is “no big deal”

Whether it is a big deal or not for you financially, do not act like it isn’t much for you. Otherwise your friend will treat it as such. More often than not, you will hear, “Oh you said that it wasn’t a big deal, so I didn’t know that you needed it back.”

One thing to help protect you when you loan the money is to (honestly) have the money dedicated for something, “I need this money for my family reunion in June. So I won’t need it until June, but I will definitely need it by then. Are you certain that you could pay me back by June?”

Think backwards

You may have a wonderful, responsible friend. But between the day you loan the money and the day that it is due, something could come up. She could have had a fender bender, or her landlord raised her rent, or she may not have the raise that her boss promised.

What if she doesn’t have the money? Do you come up with a new due date? Anticipate these questions in advance so the conversation isn’t emotional.

Ask: would they learn from this?

Ask yourself is this something that they have done over and over, or is this the beginning of something that they will do over and over again? Maybe they got in this situation because they have a car or house that they cannot afford. At the time of the repayment, they are probably still going to have this car or house, so what would be the assurances that they will have more money in three months than they do now? A good sign that they will be able to repay you is if they are working extra hours, taking on an extra job, or expecting a tax return.

Another scenario is that loaning them money could just bring them deeper and deeper into debt. They may end up borrowing more money from somewhere else just to pay you back. That "somewhere" may not be so forgiving interest-rate-wise as you are.

Are you enabling them?

This is very, very important to consider before loaning anyone money – loaning someone money can give enable them to make more bad choices. I believe that ANYONE can be enabled. If your neighbor starts mowing your front yard because he wants to be nice, the more he does it, the more you expect it. Suddenly he stops mowing your yard and you wonder why he stopped? It is the same with money (and can sometimes be much worse).

When you give someone money, they don’t suddenly turn into a responsible person. Ask yourself what would you do if you saw a few weeks later your friend has a nice, new LCD TV, but she still has not paid you back the money that she owes?

Write down the transaction

Whether it is a short email, a handwritten note, or a notarized letter, keep some proof of the money that you gave them. This will protect you. One way to do it is to just send a message to them via text or email with something like this, “Thanks for the $50 payment. That brings the total down to $350.”

The alternatives to a traditional “loan”

Sometimes you may just want to give them a small gift instead of a loan. Or have them watch your kids on the first Friday of every month until the summer. Regardless, ask yourself the important questions up front to help ease any potential heart-ache down the line.

Nine times out of ten a good friend has every intention of paying you back when you loan them money. Just be aware of the situation and protect yourself. Remember that when you loan someone money you are not making anything off of it. This “loan” could turn into a year or several years. Sometimes you may just need to say “no,” and “I cannot do it.”

Protect your future financials with a savings account or money market account, for a secure 3-5 month savings for you and your family. Here is information for a great savings account or for finding the best banks.