Today I’ll answer a question sent in by Joan, a reader: Joan’s best friend’s husband lost his job and they’re struggling. She asked Joan for a loan to help them out. It’s a lot of money for Joan to lend. She’s on a budget herself and though she has a savings, she’s concerned that they won’t be able to repay her. And right now the money is earning interest. Yet Joan does want to help her friend and feels guilty that she’s hesitant. She asked “Do you have any suggestions for how to handle this?”

I have a solid policy: I don’t loan money, unless it’s money I can afford to lose, which I never feel. Loanmg money so can create a serious rift between you and the person you give the loan to because you can get stressed trying to get it back, which can trigger arguments or the other person might feel a lot of pressure if they can’t repay it when you want, which will make them angry, even though you have a right to get your money. That’s why I try not to loan money.

Joan also said she works very hard for the money she has and would like to use it for herself and save more for her future. She’s on her own and likes having the back up saving just in case her job ends or she has an emergency. That said, Joan doesn’t want to turn her back on her friend. Many of us get into this position where we know how much someone we care about needs money but don’t want to give up our hard earned savings. It can be especially annoying if the person used to spending money on a lot more than you did and has no savings because of it. After all, if you cut corners to save and your friend spent like crazy, which should you have to suffer and give up your money now?

Use my advice to suit your own situation. If the thought of loaning money stresses you out too much, tell your friend that you’re sorry but you’re not in a position to loan money. Your financial situation is your business and you’re a friend, not her banker. Let go of any guilt before you speak or it will come across in your tone and probably make her more likely to push. Don’t argue or defend yourself. Just say you’ve given it a lot of thought and it won’t work.

If you do want to help out, don’t lend the full amount. Figure out an amount that feels a little more comfortable. Bit first, sit your friend down and ask how she intends to pay you back, and when. Then PUT IT ALL IN WRITING!! Tell her this is business for you and you’ll feel better making a loan if you have a written agreement about it. Emphasize that you’re doing this because you value the friendship and want to separate the loan from your friendship. Determine what interest you’ll get and write that down too. Both she and her husband must sign the agreement.

Put in a potential time-frame for repayment too. Don’t leave it open-ended or you won’t have a case to go to court if her husband decides not to get a job or walks out on her, leaving her penniless. Or, if they begin to have money but he doesn’t want to pay you yet. If she balks about having a signed agreement, tell her how what you loan will take away your security and you have a right to protect it. If she can’t respect that you’re doing something that will affect your ability to spend, then take back your offer to loan money. You’re doing her a big favor. If she doesn’t appreciate that, you shouldn’t make the loan.

Loaning money is rarely a good thing. People change or their situation gets worse. You must protect yourself as much as you can. DoorMats just loan and suffer when it’s not repaid. I’m still owed a lot from my DoorMat days and know I’ll never see it. But as I go forward, I rarely loan money to anyone and if I do, I have a formal agreement. You must protect yourself!
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