Your friend asks you to lend them some money. He promises that he will pay it back as soon as possible. Red flags go up everywhere in your mind, but you don’t want to say ‘”no.”
You’ve never lent money to a friend before. What are some guidelines you must follow? Here are six:
- Be very, very cautious. There are reasons why you are hesitant. First, there is probably a reason why your friend is asking you for money and not a bank. He probably does not have the best financial management track record. So you know there is a risk. Second, you know that if this loan goes awry, your relationship may go with it. You don’t want to lose a friend over money.
- Be more than fair. If you do decide to go through with the loan, make sure the terms are more than fair. Do not place an unreasonable interest rate on the loan. In this situation, your goal should not be to make as much money off your friend as possible.
- Put the agreement in writing. You and your friend need to be on the same page. Make sure both you and your friend have a copy of the loan terms. Both of you should sign each copy. Consider using a template loan agreement. Several are available online.
- Make sure they know that your “yes” is rare. You do not want them constantly returning to you for loans. This would not be good for your relationship or their long-term pursuit of financial health. They need to free themselves from debt, not continue to be a slave to it (Proverbs 22:7).
- Offer to help them make better financial decisions. Help them understand how to give generously, save wisely, and live appropriately. Lending to a friend can ruin a relationship. Teaching a friend to steward their resources can build a relationship. If you are looking for a good place to start, consider my book, The Money Challenge.
- Determine beforehand how you will handle a default. What will you do if they cannot pay back the loan? Consider Jesus’ words in Luke 6:34-35.
I generally recommend against lending money to friends, especially if you cannot afford a default on the loan. Most of the time the financial and relational risk is just too high. And a loan often does not truly remedy their financial difficulties. Frequently, they need financial guidance more than another loan.