5 Questions to Ask Before Lending Money

It’s an ask that catches you totally off guard. Your friend—who’s been having a tough time financially—cautiously puts feelers out: Is there any chance you might be able to float her a loan? Of course you want to help. But before you commit (or find yourself feeling flustered), grant yourself some time to take a beat and consider these five questions.

This question is a biggie because—bottom line—you need to be sure that whatever amount you give won’t create a financial hurdle for you down the road. This means reviewing not just your current balance and budget, but also things like your emergency savings and upcoming bills. You also need to consider outside your budget expenses—everything from a car repair to a vacation. For example, can you spare $5,000 right now if Paris is on your radar for 2021?) If you decide that, yes, you can afford to give, be sure to add the loan to your budget so it’s an expense that’s accounted for.

Your friend brought up money first, so it’s within your right to ask for details. Some specifics to find out: Is this a onetime request or does the person have the potential to be a repeat borrower? Is the cash you’re loaning for an emergency situation (say, a medical issue or child care problem) or are you helping this person put a Band-Aid on a recurrent problem (say, a gambling addiction or mortgage they can’t afford)? Whatever the reason, this insight is the key to understanding their financial behavior so you can make a clear decision. Bottom line: If you don’t feel good about the reason, don’t lend the money. 

No one wants to talk about money. But since a loan immediately adds a business element to your friendship, you have to prepare for any tension this might create. One way to reduce awkwardness is to be crystal clear with each other on the stakes of the loan. This means everything from setting up a repayment plan (more on that below) to talking through how you’ll handle late payments and status updates. If you can’t imagine this relationship not feeling awkward, you might want to take a pass. 

Now that you’re seriously considering extending the loan, it doesn’t matter how close your friendship is—you need to spell out the specifics of your agreement and put it in writing, too. Think: Monthly payment amounts and a deadline for when you expect the loan to be paid off in full.

In other words, what happens if your friend isn’t able to pay you back? Could you handle eating the cost? Would it destroy your relationship? Many financial experts encourage would-be lenders to think of a loan to a friend as a gift. If you get paid back, that’s great news; but if not, you still feel OK about it and aren’t left harboring resentment.

Maybe you can afford to help out with a personal loan to a friend. Maybe you can’t. But, if you’re inclined to say no—even after cross-checking the questions above—that’s OK and well within your right. The best way to do it is to simply be direct. Try: “I’m just not in a position to give right now” or “I don’t feel comfortable loaning money. I’m sorry I can’t help.” You don’t have to give a reason (it’s your money after all), but you can offer to help in other ways like hosting a dinner versus going out the next time you hang out to cut costs or connecting them with someone who is really good at savings strategies and can maybe shed some advice/take a look at their finances, for example.