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How To Handle Loaning Friends Money

loaning friends money adviceFriends and money can get messy. If loaning friends money is new to you, you might not be sure how to handle it. Protect your friendship and your bank account with a little bit of financial counseling and planning.

Best Practices When Loaning Friends Money

If a friend has asked you for a loan, it’s important to think through the request and your friendship before agreeing to it. Here are a few questions you should ask yourself before loaning friends money:

  • Are your finances in good shape?
  • Is this friend responsible?
  • Does this friend have a history of financial trouble or asking for loans?
  • Why do they need the money? Is it frivolous or something essential?

Evaluate Your Own Finances

In order to loan someone money, your finances should be stable. This means you actively use a household budget, are debt free or managing a small amount of debt responsibly, and have enough savings to cover the loan with some remaining in your account in case of a financial emergency of your own.

Evaluate Your Friend

Next, think about the person asking for the loan. Have you been friends a long time? Are they typically a responsible person? If they seem like a solid adult, next consider their financial life. Someone living paycheck to paycheck or struggling to eliminate debt probably won’t be able to repay your loan. They might need a more substantial intervention.

Create a Repayment Plan Before Loaning Friends Money

Finally, if the financial stars are aligning and you feel comfortable loaning your friend money, it’s critical to set up a repayment plan. The repayment plan can be simple- include the amount of the loan, a start and end date, along with payment amounts. Make sure that it’s either printed and signed by both parties or agreed to via e-mail. A paper trail of some kind is necessary so everyone stays on the same page.

Best Practices When Asking Friends for a Loan

If you are the one who needs to ask a friend for money, there are also several ways you can prepare to make a good presentation for your request. In general, getting out of debt fast should be a priority in the arrangement. Remember to be calm and collected and straightforward.

Here are a few other tips if you are asking someone for a loan:

  • You need to be able to repay your friend. Don’t risk your friendship if this loan could become a major conflict.
  • Ask in an appropriate setting. Even though you are friends, remember there is a business aspect to this.
  • Offer your own repayment plan as a starting place. This will show initiative and responsibility.
  • It’s a big request. Make sure it’s really necessary.

No matter what side of the deal you are on, loaning friends money can be complicated. It’s always helpful to be honest with one another throughout negotiations as well as knowing your own risk of carrying too much debt. In the end, preserving your friendship should be the top priority over money.

ABOUT AUTHOR / Michelle

Michelle is a regular contributor to Talking Cents. She has taken several financial courses on debt management and is ready to circulate what she has learned from them as well as lessons from her own life- family to DIY projects to student loan debt.

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