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Lending Money to Friends





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.





32 Comments, Comment or Ping

  1. 1. DoNotWait

    Well, I try to never lend money over. Not because I am cheap, but because I had bad experiences with that. It was not a couple of thousands, good for me! But back in school, I was the one who always managed to have some money in pockets for working a lot and not partying that much. I used to try help some friends lending money to them $20, $50 or even $100. Well, I never saw most of this money back. So I simply just stopped. If it was someone really close to me, who is really in need, I would consider helping but things have to be clear from day 1. By chance, I was not exposed to that sort of situation for a long time and hope I won’t soon!

  2. 2. PaulB

    I have two rules when it comes to friends:

    1. Never sell anything to a friend
    2. Never lend money to a friend

    Both rules came about as a result of losing friends in bad financial transactions. If a friend is in need I will give them money with no expectation of ever getting it back.

  3. 3. Marianne O

    If I were the lender, I would find a way to send the debtor a copy of this post (with comments).

    I would also think very carefully about why I wanted to retain the “friendship” of a person who appears to value stuff more than his friends.

  4. Lending between friends is a very dangerous place to go IMO. There is no real way to know why you are not being repaid.
    The only situation where i’ve considered loaning money to a friend was in a business proposition where the friend knew the business inside and out but we had the financial means to back the business. The agreement was that the business profits on the friends side would be used to “buy in” to our initial investment until such time we were in business 50/50. The business never actually got started due to other circumstances but we are still open to the idea with this friend as we have witnessed his excellence in the industry where we would be investing. Investing is different than lending.

  5. 5. Slacker

    I’ve had ok experience with loaning money out to friend (family emergency). Ioaned it out with the understanding that it’s an indefinite loan (despite my friend’s reassurance that it’ll be paid back “soon”). It was money that I could easily spare anyway.

    Yes, there were some awkwardness as I started noticing my friend’s spending habit afterwards…

    It was eventually repaid in full.

  6. 6. North4st

    It is tough to see the clash of value systems. Lender’s money not being paid back but the borrower spending money on discretionary things (new electronics, vacations, etc.) First rule is to get some paper on the deal. Get a signed promissory note stating the interest (even if zero) and a fixed repayment date (or “on demand”). The borrower may wonder why you need to be so formal between “good friends”, or even to family members. Just explain it is for estate reasons and, should anything ever happen to you or the borrower, the debt obligation is formally recognized.

  7. 7. ITS

    I say TomL should learn from Stewie in Family guy when Brian wasn’t paying him back…

  8. I just don’t do it.

    In most cases, people need money due to circumstances they created. Why should it become my problem?

    [edit] Just read ITS comment – hilarious!

  9. 9. DoNotWait

    Hey! I think Marianne had a good idea! Sending a copy of this post by email will surely ring a bell! Or maybe, that is a “cheap shot” but I am guessing his wife might not be aware of what is going on. So talk to him in front of his wife about the repayment. She might be thinking it is paid back.

  10. 10. Jungle

    A problem in the story was that there were no verbal terms or expectations communicated, for the reason that the lender assumed or hoped the borrower would return the money within reasonable time. The lender figures this will happen, so in the mean time, this clears him of having to communicate in any awkward situations that could offend his friend, by implying distrust and leading to a compromised relationship.

    I paid $600 to a best friend in my early 20′s, for him to do some work on a show car I used to own. He completed half the work, leaving all items unfinished, then went to China for 6 months, all while giving me 2 days notice.

    That broke our friendship, as this was a major trust/emotional withdraw. I asked him many times for the money back, he claimed he was always broke and could never provide payment. We stopped talking completely. He shows up a few years later at my front door and gives me $20 back. I told him don’t worry about it, it’s in the past now. He left the money on the table and insisted that I take it.
    Unfortunately I still don’t talk to him and its been about 10 years now since this incident happened.

    I goggle searched his name recently, and found on other car forums he had been doing the same thing. This time, posters were saying they would show up at his door demanding the money back.

    I don’t lend money.

  11. 11. R

    I have had a similar experience with a relative. The “relative” took extra time to pay back but when he did (the last instalment), he took advantage of the exchange rate and paid me less than he owed.

    Luckily for me, the issue was sorted out by my wife just casually telling them that “we did receive your last installment but it seems to be around $1K lower…” and they paying the difference later….But I do agree that it is a very risky/delicate situation to be in!

  12. 12. RickM

    From personal experience, I do not find that it’s a great idea to loan money to friends and relatives. Those who have money to loan have it because of their disciplined spending habits. Often those who continually are short of cash find themselves in that position because of their UN-disciplined spending habits.

    It is true that people sometimes find themselves “truly” in a bind, but those cases are often easily recognized and are exceptional. I’d consider lending in exceptional circumstances where the lender’s philosophical approach to handling money is close to mine.

  13. 13. Echo

    @ITS
    That would be awesome. “Where’s My Money!?!?”

    If I were the borrower I would feel ashamed to even see my friend/relative again until I paid them back in full. Let alone invite them to my house warming party. I don’t understand what’s wrong with people sometimes.

  14. 14. krantcents

    I will not loan money over a token($1-20) amount. My reason is I feel very uncomfortable asking for repayment. So uncomfortable that I will not place myself in that situation. If I did, I want a contract, regular payments and interest. I prefer not do business with friends because it adds another dimension to the equation. That is also true with relatives.

  15. 15. LJD

    I have been lucky.
    Long ago I borrowed large enough sums twice from friends, but each time we wrote out a clear repayment plan, and although they didn’t expect or want interest, I always repaid then added another payment as interest and gratitude. But I only borrowed when I knew I had funds coming to repay.

    Now that I’m more solvent, if a friend asks for money I do not “loan” it, I give it. I only hand over money I don’t expect to see back. I do make judgement calls balancing what I can afford and the legitimacy of the need, so do say no when I need to, but the “not expecting to see it back” part works best even if they think it is a loan. Then it can never interfere with our friendship, since they don’t owe me anything.

    If it comes back, bonus.

  16. 16. Clark

    Thanks to all for the comments/suggestions.

    The problem seems to be that the same level for expectation of repayment (as when we were in school) cannot be sustained, since the loan amount is higher and the commitments greater. People change with time but I would’ve thought that certain fundamental human traits like trust and friendship stand the test of time.

    I would lend to a friend in an emergency (health or otherwise) but not for buying a home, car, etc.

  17. 17. John

    If a person is a true friend and not merely a ‘buddy’ (theres a vast difference between the two that todays society glosses over) then there should not have been a loan in the first place. There should have been an Agreement that I have your back now, and you’ll have my back in the future.

    Friends are those who value you as highly as they value themselves…and they are few and far between.

    Lending money to ‘buddies’…always a recipe for loss in all contexts.

  18. I think that lending money to friends in general is a pretty bad idea. I have never done it on a bigger scale, and would never do it unless it was something formal like an angel investment with a term sheet. I just think that you are throwing money away since you really don’t want to establish yourself as a creditor.

    In this case, I think installments might be the best bet.

  19. 19. Dilbert789

    When I was in College I lent about $1000 to my best friend, plan was that he was going to pay back $100 a mth no interest. Couple months go by, and he hasn’t paid anything back. I told him by 6mths I was going to take the wheels off his car. So I did. Came out from his house in the morning and his two front tires were off. I left a note on the windshield saying where they were hidden on his property, so he could get to school (albeit a bit late). It wasn’t long after that he repaid in full and we laugh about it now and then. Lesson learned: when you screw a friend, you are going nowhere.

  20. 20. Dr. STAN

    Never. I work hard for my money. If someone is in such a bad financial position that they are unable to borrow money through regular means (bank loan! line of credit!), they are too shaky for my taste. I have been approached once or twice for loans, and was able to brush the requests aside by indicating that all my money is tied up in investments, so unavailable. Easy enough. These uneasy questions are better dealt with straight up. No waffling. I would make an exception for an investment loan, or something of that nature, but it would require a contract with crystal clear terms.

  21. 21. ZeFrench

    No written agreement = no loan.

    My mother in law has 3 children and only lend money to my wife and I. We always put everything in writing and send her annual “statement” and actualized repayment plans and the added symbolic interest. She does not lend to her other children who were considering the advances as gifts.

    Also, regarding the token loans/gifts. I lost my childhood friend when these tokens stopped being recognized as such and he stated denying the fact that I ever gave him $50 or $100. People tend to hide or lie to themselves on their actual financial situation.

    Finally, if you have a business project requiring a loan that can stand on 2 legs, you have my attention. And there will be a paper trail there too.

  22. 22. saveddijon

    I lent $5000 to a friend about 15 years ago. The loan was at interest, and he signed a promissory note.

    The first couple of payments were made just fine, and then… things lagged.

    The good news: I was paid in full eventually. It just took a bit longer than scheduled. I didn’t get all that great a return (and debtor acknowledged that) but I did get all principal back, and a little interest.

    This is not for the faint at heart. It’s too easy for a relationship to fall apart. I would stick with the advice: don’t lend any money that you are not prepared to lose.

  23. 23. E

    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?

  24. 24. Dr. Philosophy

    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.

  25. 25. Geoff

    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.

  26. 26. Kelly Clark

    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.

  27. 27. Future Money-Bags

    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.

  28. 28. P

    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.

  29. 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.

  30. 30. Andy Hough

    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.

  31. 31. chris

    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.

  32. 32. sell textbooks

    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.

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