Lending Money to a friend is a dangerous game that should be avoided if possible. Unfortunately, at one point or another, a friend may approach you for a loan, and you will be forced to make the difficult call of whether or not to give it to them. Before handing over the money, think carefully about whether or not you should give the loan. If you decide to give them the loan they need then it is important to document the transaction in order to make it legally enforceable, and don’t be afraid to remind them about the money they owe you. If it comes to it, take legal action to get the money that is owed to you.
EditDeciding Whether or Not to Loan the Money
- Decide whether or not you are willing to loan them the money. You are not obligated to lend anyone money, and many friendships have ended over unpaid loans. Therefore, you should think carefully about whether to lend them the money, especially if it is a larger loan.
- Avoid lending money to friends that you know tend to behave irresponsibly with money. You may value your friendship with them, but that doesn't mean they are good candidates for a loan.
- If your friend just needs a couple dollars to cover lunch, don’t overthink it. You may need to borrow that money later on. A few dollars here and there between friends shouldn’t be significant, if they are important to you.
- If they need a few hundred dollars to cover the rent for the apartment that their family lives in because they’ve just lost their job, then they’re probably asking out of desperation, and will do their best to pay you back. On the other hand, if they are asking for $1,000 to take their new girlfriend on a trip to Las Vegas, then you might want to reconsider the character of your friend.
- Determine how important it is to be repaid. When lending money to a friend (or to anyone, for that matter), there is always the risk that they won’t or can’t pay it back. Therefore, before you decide to lend them money, think about how that will affect you if you never get that money back.
- If it is your closest, most trusted friend and it is a small loan of around $30, it probably isn’t going to cause that much trouble if they fail to pay you back. On the other hand, lending that same friend $10,000 may do great harm to your relationship and your financial health.
- Remember that you should never lend more than you could afford to lose. If you would be unable to meet your own financial obligations if your friend doesn’t pay you back on time, then you definitely cannot afford to lend the money.
- Think of the loan as a gift. If this is a friend who is very important to you, then it may be wise to simply think of the loan as a gift. If you have the feeling that they are not going to pay you back, but you want to loan them the money anyways, then just tell yourself it’s a gift. This will help you from becoming resentful if they don’t pay you back after all.
- You can still tell the friend that the money is a loan, and that they should pay you back when they can. However, in reality, understand that you may never see the money again. In most cases, this is probably not the best way to go; however, if the friend is very important to you and the money is not, then it is one way of looking at it.
- Discuss the loan with your friend. Before taking steps to give them the loan, you should discuss the loan with the friend, especially if it is a large sum. You have a right to know what the loan will be used for, and why they don’t have the money. Explain that you don’t want money to ruin your friendship, so you want to talk about how repayment of the loan will be handled.
- It’s important to be honest in your discussions. Tell them that you want to help out however you can, but that you also have to look out for yourself. Point out that is very important to keep the lines of communication open, and that if there is a problem with paying the money back that they should talk to you rather than avoid you.
- If you feel embarrassed being so forward about the subject, tell them that your spouse/lawyer/accountant is making you be clear about all this in order to protect your own financial interests.
- Ask them why they aren’t getting a loan from a professional lender. If the loan is for a very large sum, it is certainly OK for you to ask this when considering your decision. They may have a good reason why, or they may not, but either way, it is an important piece of information that you should take into consideration.
- Don’t be afraid to say “No.” In some cases, you may not be able to afford to loan the money or you may not want to. Whatever the reason, say “no” if you need to. If the reason you don’t want to lend the money to your friend is because you don’t think they’ll pay you back, but you want to maintain your relationship, it may be best to give a different reason why you won’t be giving them the money.
- For example, you can say, “As a personal rule, I don’t lend money to friends. It’s not that I don’t want to help, but I’ve lost too many friendships over money, and I don’t want to lose you.”
- If they put you on the spot and you don’t know what to say, you can tell them you have to go home and look at your budget. Then, send them an email saying, “Sorry, I would like to help you, but it’s simply not within my means to lend you that money. Let me know if I can help you some other way.”
EditLegitimizing the Transaction
- Create a contract. Especially if you are lending a large sum of money (what “large” means depends on what you believe is a large sum), it is critical that you create a document that lays out the terms of the loan. This document will lay out who is lending the money, and to whom, how much money is being lent, when the borrower is expected to begin paying back the money, and when the sum should be paid in full. The document should also include any interest that is to be repaid.
- Understand that this document will, most importantly, protect you in the event that your friend is unwilling to pay you back. However, it also serves the purpose of making the terms of the loan clear and explicit, which will, hopefully, help avoid any misunderstandings.
- Remember to have the borrower sign and date the document, as it will not be enforceable without their signature.
- Make sure that the document is legally enforceable. Most states follow the Uniform Commercial Code (UCC). The UCC states that, in order to be legally enforceable the document must include the following information:
- It must be a written document that is signed by the borrower. You, as the lender, may also sign the document, but you don’t have to.
- The document must promise the payment of money.
- The document must state a fixed amount of money (with or without interest).
- There must be a definite time that the money should be repayed.
- The money must be payable to a holder. As the lender of the money, and the holder of the document, you are the holder.
- The document should only pertain to the money to be repayed. That is, there should be no other acts included in the document.
- Include a repayment plan. In the document, you should lay out when you expect to start being repaid, and when your friend should pay you in full by. Make sure to include any interest that you expect to receive, as well as what the consequences are if a payment is not received on time.
- For example, if you lend your friend $500 on February 1, you might lay out a plan that says that they are to begin paying you back on April 1 and that they are to pay you $100 each month with 0.5% interest on payments that are paid on time or early, and with 5.0% interest for payments not received on time. Make it explicit that the last payment should be received no later than August 1 of the same year.
- You don’t have to come up with this payment plan all on your own. You can work out something together with the friend borrowing the money, but make sure that you include all of the details in writing.
- Charging interest is not mandatory.
- Get the document notarized. Having a document notarized is important because it requires a third party to verify that the people signing the document are the people they claim to be. This is important because your friend won't be able to come back and say that you forged the signature, as it has been notarized. This usually will require both of you to go to a notary public (banks usually have one notary public on staff, but attorneys can also notarize documents) along with two pieces of photo identification, and the document to be notarized.
- Understand though, that notaries do not offer legal advice, nor does having a document notarized imply that the person signing the document understands what is in the document.
- It may seem like a lot of trouble to do all of this, but it is for your own protection. If your friend says you aren’t being a good friend by making them go through all of this, then you might want to rethink the loan, as a good friend will understand that you are only looking out for your own well-being.
- Keep the original of the document for yourself, and make a copy for your friend so that both parties can refer back to it as necessary.
EditAsking for Repayment
- Remind yourself that you are entitled to the money you lent. If your friend isn’t paying you back according to the schedule, then it’s time to take action. Before resorting to legal action, though, you should try talking to them. There may be reasons that they haven’t sent you payment, or they may have simply forgotten. Sometimes, people feel bad bringing up such a subject, but in this case, you should definitely not.
- Remember that it is your money that you earned, and they felt that they could ask you, so you can ask for it back.
- Give them a call or write an email to see what’s going on. The first time you contact them about why they haven’t repaid you, try to keep it light and casual. Make it clear that you’re not accusing them of avoiding repayment, but that you’re concerned for their welfare, and want to be of help if you can.
- For example, you can say something like, “I just wanted to give you a quick call/email to see how things are going. I noticed on my calendar that you were supposed to send me a payment yesterday, but I didn’t notice anything in my bank. Is everything alright?”
- Contacting them in a very offensive way will immediately make them defensive. If you call and say, “You owe me my money, and you didn’t repay on time, what the heck is going on?,” you sound angry and like you’ve already assumed that they are never going to repay.
- Try to be understanding of their situation, at first. If this is a friend you have known for a very long time, and that you trust completely, it is OK to give them a little wiggle room, if you want. If you get in touch with them, and they explain that they had not forgotten about the payment but that their child broke his arm, and they needed the money to pay for the doctor, but that they can get it to you next week, then it may be wise to give them the benefit of the doubt.
- Giving them the benefit of the doubt is for your friendship. However, if it is a friend you do not have much trust in, or they don’t seem apologetic or concerned about late payments, then there is no reason to be understanding.
- Warn them of what will happen if they don’t repay you. If your friend continues to avoid repaying you, tell them what will happen if they don’t pay you back. This is not a suggestion that you should threaten them with violence, but rather that you won’t just give up on getting paid back what you’re owed. For example, explain to them that if they don’t pay you back, you won’t ever be able to loan money to them again.
- You may also explain how their failure to stick to their end of the deal has really damaged your trust in them, and that you don’t feel like you want to be around someone you can’t trust.
- Remind them also, that you have a written agreement. So not only are you able to withdraw your friendship, you are able to take them to court if you want to.
- Begin sending past due notices. If you think that you are eventually going to have to take your friend to court, it is important to create a paper trail. Therefore, sending them past due notices in writing after 30 days, 60 days, and 90 days will help you to establish what happened in the event that legal action is taken.
- Be sure to keep copies of the letters and send them via certified mail so that your friend won’t be able to say they never received them.
- State in the letter the terms of the loan and when they were supposed to have paid you.
- Let them know you will pursue legal action. If your friend continues to avoid paying you back, it may be time to get tough, especially if you don’t believe the reasons that they’re giving you as to why they haven’t paid you back. Contact them again, either by email, phone, or in person. Calmly let them know that you didn’t want it to come to this, but that if they can’t pay you back the money they owe up to that point by a certain date, that you will be taking legal action.
- Understand that this may offend your friend, and you do risk ruining your friendship. However, if you value the money more than the friendship, it is what you will need to do.
EditTaking Legal Action
- Decide if getting the money back is more important than the friendship. If you have tried to get the money back from your friend by talking to them, but it doesn’t seem like they are going to pay you back you have two options. You can just give up and convince yourself that the money was a gift, or you can take legal action to get the money back. However, if you do decide to take legal action, realize that there is a decent chance your friendship will be over.
- Depending on the size of the loan, it may be worth taking legal action (assuming you took steps to prepare yourself for this possibility when you gave the loan) even if it does ruin your friendship. Someone who borrowed a large amount of money, and didn’t care enough to pay you back is not your friend.
- Understand that money you give as a “gift” to a friend is not tax deductible, so you cannot claim it as a deduction on your tax return. Furthermore, you may be subject to the gift tax if you are a US taxpayer and you give them over $13,000 in a calendar year.
- Prepare your documentation. Hopefully you have taken steps to protect yourself from this occurrence, so you will have your signed, notarized document stating that you lent money to your friend, and that they were supposed to have paid you back by a certain date. If you do not have such a document, you may still be able to take them to court as oral contracts are considered binding. The problem is that the existence of oral contracts are very difficult to prove.
- If you had an oral contract, you might be able to prove that such a contract exists if there was a witness to the agreement.
- Gather together any emails you may have sent asking for the friend to repay the loan. This will create a paper trail, which will demonstrate that you’ve tried to resolve the matter by other means.
- Hire a lawyer. At this point, you will need to hire a lawyer who will guide you through the process of taking your friend to court. The lawyer may begin by writing an official letter to your friend asking them to repay the money that they owe you, or be ready to deal with the issue in court.
- Sometimes, an official letter such as this will be enough to motivate your friend to start repaying what they owe.
- Be aware that a lawyer won’t be free. You will have to pay them for the services, so be sure that the money you are to be repaid will be more than the amount you will have to pay the lawyer. Otherwise, while you may get your money back, you may end up losing money or just breaking even depending on the sum involved, and the services the lawyer needs to provide.
- Settle your dispute in small claims court. Unless you have lent your friend an extraordinary amount of money, you will likely deal with the matter in small claims court. If you have hired a lawyer, they will guide you through the process of filing a claim. If you haven’t, you will need to contact the county clerk where you live (or where any agreement you created was signed), as the rules for filing a claim vary from state to state.
- Generally, you will need to sign an affidavit confirming that you have tried to resolve the issue outside of court, fill out a complaint form, which asks for the details of the claim, and pay a filing fee, which can typically range from $15 up to $100 depending on where you live.
- At this point, you must send a “statement of claim” to the defendant (your friend). You can do this yourself, through your lawyer, or through hiring a private company who will “serve” the defendant.
- If your friend continues to avoid repayment, you will typically both be required to appear before a judge who will determine what course of action to take. Keep in mind that if your friend decides to repay you what you’re owed at any point, it is your responsibility to contact the courts to let them know.
- If your friend is not repaying you as they said they would, and you aren’t able to get in contact with them, it’s possible they may be dodging you because they are embarrassed or don’t have a way to pay you back. In this instance, you may want to let them know in a voicemail or email that if you can’t get in touch with them by a certain date, you will be forced to take legal action. Be clear that if they get back to you, you’re willing to listen to the reasons they haven’t gotten in touch, but you need your money back as soon as possible.
- If your friend is approaching you for a large loan it is probably because they don’t have the credit score necessary to obtain a loan from a bank. While there may be perfectly good reasons for a lack of credit, a low credit score is an indication that they haven’t made good on their promises of repayment in the past.
- In general, it is a bad idea to lend money to friends. If the friend does not pay the money back, you have lost a friend and money. Giving them a (small) portion of the needed money is a good alternative to a loan.
- If you are in a committed relationship, be sure to talk with your spouse about the loan before giving it. They may be upset if you loaned your whole savings to a buddy without talking to them first, and if they money isn’t paid back, they’ll probably never let you forget it.
- Write a Letter to a Friend of the Opposite Sex
- Get Someone to Tell You a Secret
- Have Respectful Friends
- Identify a False Friend
- Borrow Money from a Friend