There are several questions to ask before lending money. If a friend needs financial help, you might be quick to jump in and offer assistance. This is especially true if you have additional cash. But sometimes, lending money can trigger problems with the borrower. To avoid any issues, here are seven questions to ask before lending money to friends.
1. What’s the Money for?
One of the most important questions to ask before lending money – what's the money for? Don't feel awkward about asking this question. If the person is bold enough to ask for cash, he or she should be prepared to answer this question. Besides, as the person lending the money, you have a right to know how the other person plans to use the funds.
2. Does Your Friend Have a Bad Money Reputation?
When deciding whether to lend money, take into consideration the person's financial reputation. Is the person usually responsible with her money? Does this person have a habit of borrowing money and never repaying loans? Assessing the person's financial reputation can help you decide whether it's wise to lend your hard-earned cash.
3. Has Your Friend Helped You in the past?
Even if you prefer not to lend money to friends, consider whether this person has helped you in the past – whether it was financially or with another issue. Sometimes, it takes a lot of strength and encourage to ask another person for financial help. If this person always repays his or her debt, it might be safe to lend the money.
4. Do You Have the Money?
At the end of the day, you can't lend what you don't have. Therefore, if someone asks to borrow money, don't give an immediate answer. Take a close look at your current finances and determine whether you have the money to give. Ideally, you don't want to lend money if you have upcoming bills, such as rent/mortgage, car payment, utilities or other expenses.
5. Can You Afford to Lose the Money?
Even if your friend has good intentions, there's always a chance that the person won't repay the loan. Therefore, consider whether you can afford to lose the money. You may wish to help someone financially, but it's never a good idea to lend money you need for bills. If you lend a friend half of your rent money, she might not repay this money by the time your rent’s due.
6. How Important is This Friendship?
Since there's always a chance that the person will be unable to repay a loan, you need to consider how much you value the friendship. I'm a firm believer that friendship and money do not mix. Therefore, if you want to keep your close friends close, you need to keep money out of the equation. If you give a friend a sizable loan, and he or she doesn't repay, it might be difficult to remain close with a debt hanging over the relationship.
7. Do You Have a Written Agreement?
If you decide to lend money to a friend, create a written agreement. This agreement should outline all details of the loan, such as the loan amount, any interest charges, and repayment terms. A written agreement can avert any confusion or misunderstandings regarding the loan.
Lending money to friends is risky business; but at the end of the day, you have to decide whether this is a smart move for your money. What are other questions to ask before lending money?