It doesn’t matter whether you’re the potential lender or the potential borrower - having a loan between two friends opens the potential for some real problems.  Even the best of friends can find their relationship soured once money enters into the equation.  The fact remains, though, that sometimes there are people who need money, and sometimes there are people who care about them willing to lend it.  It may seem cut and dry, but it’s a situation that should be entered into with caution.

How do you loan money to a friend without ruining the friendship? As anyone who’s done it before can attest, it’s harder than you may think. Once you give a loan to your friend the relationship changes whether you like it or not.  You’re not just “Bob’s good friend” anymore; you’re “Bob’s friend and person he owes money to.”  That change alone can cause awkwardness and tension in the relationship.

Here are the best ways to loan money to a friend (or family member, for that matter) without wrecking your relationship:

Just give him the money.  Have you considered just gifting the money to your friend? If you can afford to do it then consider simply giving the money to your friend without any stipulation for repayment.  Make clear that it’s a gift and you don’t ever want him to pay you back.  This move can save your friendship while also allowing you to do something really nice for your friend.  Just make sure that you understand the tax implications when gifting over a certain amount.

Don’t loan money you cannot afford to lose.  You should never loan out any money that you absolutely need to survive.  For example, don’t loan someone next week’s grocery money if it means that a late payback will result in you not having any food to eat.  Nothing sours a friendship faster than one person avoiding the other because he can’t afford to pay back a loan.  Any money that you loan a friend should be money that you can live without.

Notate everything.  Write down the terms of the loan.  How long can your friend take the pay back the loan? Will there be any interest on the loan? How much will payments be? What happens if the payment is late? Everything should be spelled out on paper and signed by both people.  Preferably, you will have the document notarized and recorded somewhere so it becomes a legal document.  Don’t leave any aspect of the loan left up in the air.

Use a neutral third party.  Find a service that specializes in managing person-to-person loans.  For a relatively small amount of money you can hire someone else to draft the loan papers, record a lien if necessary, and even service the loan.  This means that you only need to hand over the money and then allow someone else to handle collecting payment and all the other annoying tasks that can come with maintaining a loan.  This makes the transaction less about you and your friend, and maybe even allows the relationship to remain intact. One such example is Virgin Money, but I’m sure there are other services out their that charge a little less.

Loaning money to a friend is not always the kiss of death to a friendship.  Some people do just fine with lending and borrowing money from the people they love.  If you’re going to jump into this type of situation, though, it’s best to set it up to where you both won’t wind up resenting each other over a late payment or some other occurrence. And ultimately, the old maxim rings true: don’t lend money to friends or family unless you’re prepared to lose it. 

Related posts:

1. Are Your Friends Putting You in Debt?
2. 7 Money Mistakes Newlyweds Make
3. Authorized Users: Choose them wisely or not at all
4. A REALLY Stupid Money Move
5. Can Money Buy Happiness?