If your friend is in a tight situation, helping them out with a loan could seem like the right thing to do.
But before you agree to loan out that money to your friend, below are things you should consider.
Is lending money to friends advisable?
No matter how much money you’re lending, a loan between friends could result in serious trouble. Without proper protection, you could lose out on both your money and your friendship you must have built for years.
However, if you consider the right precautions, it could be a really nice and cost-effective way to lend your friend that helping hand they need.
Lending money to friends: do’s
• Agree on the loan terms
Sit down with your friend and agree on both a time span and the monthly payments. That way, you will both have a clear idea of what you are both getting into without any discrepancy.
• Write up a contract with signatures
A contract will help you avoid any conflict or discrepancy down the line. It could be worth getting an independent witness to get involved by signing the contract too.
• Set up a standing order
A standing order will immediately shift the payment from their account to yours on a particular date each month. This will reduce lots of unwanted communication, and it’ll save your friend from ever forgetting the payments too.
• Charge interest
If you’ve got into your savings or you’re having to save little each month, it’s worth adding a fee to help you increase the costs.
Lending money to friends: the don’ts
• Lend without a backup plan
You should only go into an agreement if you’re confident you can still manage should you not get paid due to extreme situations.
• Assume they can repay you especially without proof
Before getting out the checkbook, it’s worth making sure your friend can repay your loan. Just like a bank checks your financial history, you shouldn’t definitely take your friend’s words without getting some tangible proof to back up their claims.
• Lend to someone without a stable income
If your friend doesn’t have a stable income, there’s likely no guarantee he or she will be able to make pay back the loan. It might seem unfair, but if their financial life looks unstable, your own finances could be at risk by helping with that loan.
What happens if my friend doesn’t repay my loan?
First things first, you should communicate with your friend in case of any difficulties that may arise. Between you two, you could simply figure out what the best solution is if it is becoming a struggle to repay the loan.
Whether your friend needs to take a payment holiday or reduce their monthly payment rate, there should be a way out. Just make sure you update the contract with any changes that occur.
But if they’re totally not willing to pay your money back, you might need to take legal actions against them. If you’ve lent your friend a small amount in thousands, you could take the issue in a small magistrate court. If you’ve lent more in millions, you should seek legal advice from your lawyers on what legal actions you should take.