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Key things to consider before lending money to a friend
Say no if you can’t afford it, and make sure any terms and expectations are clear.
If a friend asks to borrow money, it’s natural to want to help out. But at a time when every pound or even every penny counts, it’s a good idea to think carefully.
Lending money can potentially lead to feelings of awkwardness, resentment, or even arguments if the money isn’t paid back as expected.
To help limit the risk of misunderstandings, it’s very important to both be “crystal clear about the arrangement from the get-go”, says Emma-Lou Montgomery, associate director of personal investing at Fidelity International.
“Before you even consider agreeing to loaning your money, make sure you’re in a truly secure financial position before proceeding, as by loaning too much you may be inadvertently getting off track with your own financial goals,” she adds.
Georgia Galloway, from loans service Finbri, suggests getting the details of the loan down in writing so that everyone is clear – “even if it’s just a text message”.
Galloway adds: “Whether you’re lending £100 or £5,000, having it in writing makes it simpler when it comes to getting the money back. Details of verbal agreements are too easy to forget or misinterpret, leading to complications and arguments later down the line.”
If there’s a firm date for the money to be returned, don’t hesitate to bring it up when that date comes along, Galloway says.
“Assuming they’ll pay you back on time can lead to resentment if they don’t, and chasing it up can feel awkward once the date has passed,” she adds. “So send a quick message to check in on the day that the money is due back, to make sure it’s not forgotten.”
Montgomery also says it’s important to be transparent throughout the loan and repayment period, to ensure you don’t impact the friendship and cause any unnecessary emotional stress.
For example, one of you may reduce your working hours or lose a job, which could have an impact on the borrower’s ability to pay the money back, or may mean the lender needs the cash back more urgently than originally thought.
“Depending on the amount you are comfortable lending, it may be worth speaking to a solicitor or financial professional and have some form of loan contract drawn up, as this will formally define how much was lent, and set out the agreed repayment plan and timeframe, all of which will help avoid any disagreements or misunderstandings later on,” Montgomery adds.
And if you can’t afford to lend money, you shouldn’t feel bad for saying you’re unable to help out, says Galloway.
“Don’t let guilt make your decision for you and lead you to agreeing to lend money you don’t have,” Galloway adds. “Also, be aware that other friends may hear about the loan and ask to borrow money themselves, so don’t let yourself feel guilty about saying no to them when you said yes to someone else – there’s only so much you can lend.”