There are many sound reasons why you shouldn't loan money to a friend. You may have the best intentions in wanting to help them out, but it can backfire quite seriously. At best, lending money to a friend can cause resentment, at worst it may threaten your own financial security or destroy the friendship. Here are some good reasons why you shouldn't loan money to a friend …
One of the most important reasons why you shouldn't loan money to a friend is if you can't afford it. It's sometimes said that you should only lend money if you're prepared to run the risk of not seeing it again. So if you just can't afford to lose the money, it's a very good reason for not lending it. Even if your friend hasn't asked you, don't make an offer that you can't afford.
Borrowing money from a friend may be far easier than taking a loan from a bank or other commercial lender. Unfortunately, this also means that the borrower usually doesn't take the loan as seriously as a loan from a bank. This relaxed attitude can lead to vague promises to pay it back or behaving as though repayment is not that important.
You might want to help a friend out, but if you do, your friendship could be put at risk. They may resent being reminded to pay the money back, even though you are in the right. If you don't get the money back, it ruins the friendship - how could you trust them again? Of course, they shouldn't really ask - and if they do, they should accept your decision if you decline.
Have you ever made repeated loans to a friend? Even if they always pay the money back, the fact that they have asked more than once is a red flag. If they repeatedly get into financial difficulties through their own financial mismanagement, it's not really helping them if you keep bailing them out. They need to learn better financial habits so they don't keep having problems.
When a bank lends money, it imposes conditions, makes checks, and chases up the borrower if they miss a payment. That's business; people accept the requirements imposed, and know they will face consequences if they default. Lending money to friends is informal. When will it be paid back? What can you do if they don't pay you back? How can you prove that they owe you money?
You might think that you can trust your friend completely, but things can still go wrong where money is involved. What if they lose their job and have no income to repay you? You have to chase them if they don't pay back the money, and that will be very unpleasant for you.
Finally, the issue of legal protection is important. You may be able to prove that you lent money to your friend, but can you afford to take legal action if they default? As an individual, you don't have a legal department behind you as a loan company does. And will you actually be able to prove it anyway?
A true friend will understand if you don't want to agree to a loan - or wouldn't put you in an awkward position by asking. It's really best to avoid lending money to a friend; even if you trust them and believe that they will repay you, plenty can go wrong. Have you ever lost a friend because of money?