This is a column from regular contributor Clark.

I’ve read that one should avoid loaning money to friends (and relatives) and do so only if it is money or relationship they can afford to lose. I’ve not loaned money to anyone yet, but I’ve been the beneficiary a couple of times during my school days. Recently, while hanging out with friends, I heard something related to the above and thought I’d share the story.

Since our school days, lending money among friends has been common in our circle with no questions asked about the return date. Generally, the amounts were less than a thousand dollars and they were paid back within the next couple of months. I don’t recall any incidents that involved friends fighting over unpaid money after, say, 6 months. I think one of the reasons for these smooth peer-to-peer lending transactions, albeit without any interest, was the recognition by the borrowing friend that the lending friend was also in school – meaning that neither of them was rolling in money and that the lender was as likely to fall into a bad month, money-wise.

Fast-forward to this day, and some of us are employees while one or two are entrepreneurs. Such an entrepreneur friend (I’ll call him TomL) had lent some money (a few thousand dollars) to a mutual friend (I’ll call him AndyB) to cover his first home’s down payment. Now, I am not going to go off on a tangent to rail at the need for AndyB to buy a house at that specific time without enough of his own money for the down payment. Maybe, he read/heard somewhere that the market was getting hot and that he may miss the bus, if he waited longer. Or, the new mortgage regulations that came into effect in April 2010 had something to do with it (the money was loaned in January and a house bought before April).

Several months later, the money has not been returned. TomL had requested repayment, at least on an installment basis, but to no avail. TomL is unwilling to press further for fear of straining the relationship. AndyB got married recently and subsequently, invited a few friends (including TomL and yours truly) to his new home. The place looked great with excellent furniture, new LCD TV, and a few other gizmos. After our exit, the obvious question I had (for TomL) was “He doesn’t seem to be running out of money for furniture and other gizmos; doesn’t it annoy you that when your loan topic comes up, he uses the money-is-tight excuse?” TomL’s reply was “Do you think I could not see the stuff in his home? But do you expect me to ask him the same question that you just asked me?”.

Now, it is entirely possible that AndyB is speaking the truth when he uses the money-is-tight repayment extension phrase. Maybe, all the things we saw at his home have been bought on credit. If so, then AndyB has several problems – weakening friendship with TomL, piling debt and no potential lender from his old circle of friends for the future. On the other hand, AndyB and his wife are employed and if they are doing well (say, if the items were purchased with saved-up cash), then he is using the friendship as a tool to get ahead financially (who else would give an interest-free loan in a pinch?).

I do not know how this situation is going to get resolved. Maybe, someone will instill good sense and make AndyB repay the loan, at least in small installments. I cannot be that problem solver because it would put TomL in bad light, showing him as one who has been going around telling friends about the unpaid loan. There is a witness friend for this transaction but he does not want to “poke his nose” into someone’s affairs. As far as I see it, it has got to be TomL who takes the initiative (again but in a sterner tone). TomL is looking to buy a home of his own soon and maybe, that will be valid justification to ask for the money (oh, the plight of the lender!).

Have you ever been a borrower (of a few thousand dollars) from friends? What would you do if you were the lender in this case without losing the friendship?

About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.

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Clark

Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.
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sell textbooks
10 years ago

I have a certain way I go about this. I never lend money, I give it. But only when I can afford to lose it. If I get paid back Great, but if I don’t, I am not disappointed and then I don’t have a weird-ed out friend who is wary of being around cause they didn’t pay me back. If you can you should, Maybe one day you will need some help and someone will be there as you were there for someone else. It doesn’t even have to be the person you loaned to, but you will get it back, all because you were a good person and helped someone out when you could. It really does work out in the end.

chris
10 years ago

i lent a friend and coworker $2000 and $1000 once.
i genuinely trusted his character (extremely nice and honest person), so although i was a little concerned, he ensured me that he was able to pay me back in short time.
and both times he did.

i consider it an isolated incident on my viewpoint of lending money to friends.
would i do it again? it really depends on the person and his/her circumstance.

Andy Hough
10 years ago

I lent a few thousand dollars to a friend earlier this year. He has paid most of it back but it should have all been paid by now. He has had some employment changes so I’m not worrying about it because I know he’ll repay me when he can. If it was money I really needed or couldn’t afford to lose I wouldn’t have lent it and he’s the only person outside of family I would have lent money.

Carmen Brodeur
10 years ago

I am adamant about not lending money to friend or employees. My husband is the softie. He always wants to lend the money and I have to put my foot down. We have lost a lot of money in the past and I will never repeat that mistake again.

P
10 years ago

Counter to my wife’s suggestion, I loaned a huge sum for my friends business which went under. 5 years, no recovery yet. I am hopeful it will be paid back, but if debtor is not living a frugal lifestyle, then it hurts.

Future Money-Bags
10 years ago

I lend money to friends quite often. I make many group-purchases on 1 card,and they pay me back with cash. Its easier to keep track of and easier to make trips, etc.
Also, I have directly lent money to friends, ranging from $1k to over $3k. And I setup a repayment plan to ensure I got the money back, by a certain date. And if I didn’t get it back, what would need to happen.
the very first loan I made, I am still slowly receiving it back. As the debtor is a student and realistically has a hard time just paying for school, I do not mind. Plus I know he is good for it.

Would I do it again? Yes, but not in a heartbeat (I always have to assess the situation). I would ask what its for, how they will come up with the money to pay me back, how long it will take, what if they can’t get the money by those means (maybe they will have to get a line of credit to pay me back).

Sure I work and save rediculously hard for the money I have, but it sure feels nice to help a friend or family member out when they are having a tough time. I don’t do all this for me, its for my family and the future of my friends and family.

Kelly Clark
10 years ago

I think that lending money to friends or family should simulate a lending transaction with a bank: if the bank doesn’t feel comforable that the person has the means to pay it back, they don’t lend them money; terms of repayment are set out at the start.
Why should lending money to a friend differ? If I was TomL, I probably wouldn’t have lent money to someone who couldn’t save for a downpayment in the first place. However, if there were extenuating circumstances, I would have set specific repayment terms (i.e. an installment plan).
This doesn’t mean that the friend will hold to the terms, but it is more likely they will try, if it isn’t just an open ending transaction.

Geoff
10 years ago

I don’t get it.

“Do you think I could not see the stuff in his home? But do you expect me to ask him the same question that you just asked me?”.

HELL YES. I frigging would. In private at first but if he stalled, in public. Grow some cahones my friend.

When people say “it’s not the money, it’s the principle” – IT’S THE MONEY.

Dr. Philosophy
10 years ago

As a person highly influenced by the idea that I could easily be in whatever boat the guy next to me is in (a la John Rawls), I tend to be in theory sympathetic to requests for charity. Make no mistake: a friend asking another friend for money is charity unless there is market-rate interest involved. But if there’s market-rate interest involved then it’s no longer a friend asking another friend to borrow money, it’s a business transaction. So requests between friends to borrow money are requests for a helping hand.
The intuition that lending a helping hand is right or good, I think, is what leans certain people towards accepting a friend’s request for charity. As good money pros, we should however be aware of the costs of acceeding to these intuitions. 1) there are no donation receipts to be claimed on your tax return
2) you cannot use the money for something else until it gets repaid, if it gets repaid
3) you stand to lose a lot more than just $ by thinking your ‘loan’ is anything more than charity
I would try to avoid ‘lending’ out anything more than I could afford to lose once 1-3 is factored in. Since I am poor (current net worth negative $16000) that is pretty much nothing.

E
10 years ago

I think that I would only loan money to very close friends or family members where I know that they are usually responsible with their money and have a sudden emergency. I have friends who I have gone out with only to get to an outdoor event and they turn to you and say oh do you have an extra $15 or $20, I forgot to go to the bank. You say sure loan them this small amount and they never bring it up again. Is it a small amount? Of course. Can I live without it? Sure. But will I loan you ANY money ever again? No, I will not. If you can not aknowledge a small amount of money that has been loaned to you, than how can I expect to get back a large amount from you. For the most part (not always, but most) if someone asks you for money than you know them pretty well. Some of my friends and family are good with their money and live within their means, others are quite the opposite. I would not lend money to anyone who needs money this week to get by, because they are wearing clothes and living in a house to keep up with their neighbours. I have to live within my means in order to have money set aside. If friends and family are so wrapped up in appearances that they can’t save any money for a minor set back, than what makes me think that they are responsible enough to pay me back a loan?