If your friend is in a sticky spot, helping them out could seem like the right thing to do.
But before you agree to hand over any money, there are several things you should consider.
Is lending money to friends ever a good idea?
No matter how much money you’re lending, a loan between friends could spell trouble. Without protecting yourself properly, you could lose out on both your cash and your friendship.
However, if you take some necessary precautions, it could be a cost-effective way to help your friend in need.
Lending money to friends: the do’s
Agree on the loan terms
Just like you would with a bank loan, it’s really important to agree on the specifics. If you lend a friend money with no end date in mind, you could run the risk of dragging the loan out far longer than you intended.
Sit down with your friend and agree on both a timescale and their monthly payments. That way, you’ll have a clear idea of what your budget looks like going forwards.
Write up a contract
You’ve both agreed on a realistic time-frame and loan amount. Next, it’s worth putting pen to paper and creating a legal contract that outlines what you’ve both agreed.
This can help you avoid any conflict or confusion down the line. It could be worth getting an independent witness to sign the contract too.
Set up a standing order
Nagging your friend to repay their loan every month will get old, fast. To save any awkwardness or difficulty, get your friend to set up a standing order from the offset.
A standing order will automatically shift the payment from their account to yours on a certain date each month. This will reduce lots of unnecessary communication, and it’ll save them from ever forgetting too.
Charge interest
If your friend is asking for help, they’ve likely struggled to get accepted from the bank. If that’s the case, they’ll be facing high-interest rates from alternative lenders.
However, that doesn’t mean you have to loan them money for free. If you’ve dipped into your savings or you’re having to save less each month, it’s worth adding a fee to help you mitigate the costs.
Lending money to friends: the don’ts
Lend without a backup plan
Imagine the worst-case scenario. You’ve agreed to lend your friend money and their situation changes – they can no longer afford your agreed monthly repayments. Can you still afford to keep up with your own commitments?
If the answer’s no, it’s best to avoid lending money to a friend. You should only ever agree to a loan if you’re confident you can still manage should the worst happen.
Assume they can repay you (without proof)
Before digging out the cheque book, it’s worth making sure they can repay your loan. Just like a high street bank checks your financial history, you shouldn’t simply take your friend’s word they can afford the loan. If they share their bank statements with you, you’ll be able to see if they can stick to their end of the agreement.
Lend to someone without a stable income
If your friend doesn’t have a fixed income, there’s no guarantee they’ll be able to make their repayments. It might sound unfair, but if their financial situation looks uncertain, you could put your own finances at risk by helping out.
If you have more of a flexible agreement in place, it might not bother you if they don’t stick to their agreement every single month – but you should make this clear in your contract.
What happens if my friend doesn’t repay my loan?
First things first, you should speak to your friend if any difficulties arise. Between you, you could figure out what the best course of action is if they’re struggling to repay the loan.
Whether they need to take a small payment holiday or reduce their monthly amount, there should be a solution. Just make sure you update your contract with any changes to the loan.
But if they’re refusing to pay you back, you might need to seek legal advice. If you’ve lent your friend less than £5,000, you could resolve the issue in a small claims court. If you’ve lent more than this, you should seek independent legal advice.
Could a guarantor loan a better option?
A guarantor loan could be an alternative way to help a friend. If you’re a guarantor, you’ll agree to repay your friend’s loan if they can’t. This can help them get approved if they’re struggling to find finance elsewhere.
However, you won’t need to lend them any money upfront – you’ll only need to dip into your own funds should they hit any problems during their loan.
