Advice On Lending Money To Friends

There are many people out there who have encountered a somewhat sticky financial situation. That situation arises when you are asked by a friend for some money. Before you make this move, it is important to get advice on lending money to friends. Providing this sort of loan can create some problems that are unnecessary if due diligence is not done and if the two parties have different expectations going into the process. This advice is also good for someone looking to borrow money from a friend. So what is some advice on lending money to friends? It all starts with a clear understanding of what is expected.

Lending Money For These Reasons

So what are the ways that you might be asked to lend money to a friend? It might come up in any of the following settings:

  • A simple request for a few dollars for some stated purpose.
  • Your friend needs a few bucks to make it to the next payday.
  • A planned, well detailed request for a larger loan.
  • A spur of the moment, large loan for an emergency.

How to Lend Money to a Friend

The advice you need to follow, for friends borrowing money, all depends upon the relationship you have with that friend. Some friends are close enough that they can make this happen without any sort of contract or written agreement. Others feel more comfortable with something on paper, since this makes sure that your friend understands what he/she has to do to make the loan right in the end. Another thing to consider is if lending a friend a few dollars will hurt the relationship. If they don’t pay you back, is losing the money worth losing a friend? There is definitely a level of risk involved with lending to friends so protect yourself.

Sample Contract for Friendship Lending Money

  1. Get the borrower’s personal and contact information such as address, date of birth, social security number and/or driver’s license number. Make sure the lending money contract includes these details.
    • Loan Amounts – There is no minimum amount of money to lend to friends. Whether a friend should lend a large loan to another friend depends on your own relationship with this person and your own financial status.
    • Loan Period
    • Interest Rates – See below for more information on interest rates
    • Payment Schedules
  2. Write down a statement that includes all of the above information. Any additional details that is pertinent to the agreement should also be included such as collateral if any.
  3. Get a witness.
  4. All parties should date and signed the contract.

Remember to sit down with a friend and figure out what is going on. Is it for a legitimate purpose? Have they looked into other borrowing options? If you come to the conclusion that you are the last possible source of money and the loan is for some useless purpose, then you can proceed from there. It is always good to set a time frame and an amount of money to be paid on certain dates. This will help clear up any confusion and it will make it possible for your friend to pay back the loan on responsible terms.

One of the big questions that many people have when asking for advice on lending money to friends is whether or not to charge interest? Since most friends come to you in a time of need, it is probably best to avoid interest. If you do not feel so benevolent, then you might work out a low interest rate.

Figuring Out an Interest Rate For Friendly Personal Loans

Here are a few sample interest rates you can charge your friends. You can base your decisions depending on how close you are to this friend. Just make sure to write this interest rate on a contract and additional stipulations.

  • One Lump Sum – Regardless of when your friend will repay you, the charge will be 5% or 10% of the total amount. So if they borrow $500, they will have to pay back $525 or $550.
  • Or you can charge interest on the remainder of the loan amounts at the end of every month. A daily accruing interest rate would probably create more hassle than you want to handle.
  • 0% interest rate – Provided they can pay a minimum amount each month or they can pay back the total amount loaned at the end of the agreed date, they will end up paying no interest.

Personal Loan As A Gift

If you have no expectations of getting any money back from your friend, then you have nothing to worry about. Consider your friendship loan, a gift. Your friendship will remain intact and you will not have to work out the money contract details. However, a personal loan to a friend can be a true test of friendship. Ask yourself, would you be willing to end a friendship based on the monetary amount?

If you come to the conclusion that you would rather not lend your friend some money, be a friend with lending options. Introduce them to credit unions or online lending resources that can give them a low interest rate on their loan. Be a friend instead of a bank.

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