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Centuries ago, none other than William Shakespeare wrote, “Neither a borrower nor a lender be, for loan oft loses both itself and friend.” That is a wordy way of saying that if you are lending money to friends, you should understand that you may lose both. That often creates a lot of tension between the borrower and the lender, which can often lead to guilt and remorse, if not anger.

The Inherent Danger of Loaning Friends Money

Put simply – the potential risk of causing irreparable damage to your friendship should be at least part of the discussion you have regarding either borrowing or lending money to a friend or relative.

If You Think They Won’t Repay It

If you believe there will be trouble if you turn your friend or family member down, you should realize there are ways to do so without insulting them. For example, you can say: “I’d like to help, but I’ve heard so many horror stories about family members who lend each other money. How can we do so in a way that prevents any bad feelings happening between us?” Still, it’s never easy to deal with friends borrowing money. There are countless cases in which a well-meaning person lent money to a friend and was never paid back.

Evaluate the Possible Alternatives

If you are among that group of people who can afford to lose a few hundred or a few thousand dollars and not miss it, that’s wonderful. However, if you’re like most people, you can’t afford to give away a lot of money and never see it again. Therefore, while you don’t want to leave a good friend or a family member in the lurch when they have an emergency, it’s also a good idea to evaluate the situation you’re in thoroughly and consider possible alternatives.

Know the Terms of the Loan and Protect Yourself

While you may typically think what your friend does with their free time and their money is none of your business, if you are being asked to loan them money for an emergency, you have a right to know whether or not they will be able to pay the money back.

Lend Money Together With Several Friends

For example, before loaning your friend, say $2,000, perhaps you and several other friends could pitch in, thus reducing the burden on you. Four friends could possibly lend $500 each or five could give $400 each. You should also look closely at your friend’s lifestyle somewhat. Your friend may have an emergency, but what caused the crisis? Is he late with the electric bill because he’s not making enough money, or is it because he goes out partying every weekend?

Encourage Your Friend to Explore Alternatives

You should also encourage your friend to explore alternatives. They could take out a personal loan or a payday loan and offer to help them get out of a jam if it arises, or offer to co-sign a personal installment loan, but only if you are reasonably sure they’ll be able to pay back the loan on time and without penalty.

Setting the Repayment Schedule

If you agree to loan your friend the money, set the payback schedule before you decide to lend your friend the money, and put it in writing. In many friendships, the idea of written agreements may look like an insult, but if your friend doesn’t pay you back, you will have no recourse if the deal isn’t written down.

It’s quite common for a friend to loan money to another friend on a promise to pay the money back in a month or two and to see nothing a year or more later. It’s also common for a friend who owes another friend money to live rather extravagantly, despite the debt.

The Unfair Reasons for Not Paying The Money Back

Imagine a friend who owes you $1,000 eating at excellent restaurants and not paying you back, while you eat inexpensive meals at home because you were expecting to be paid back at a rate of $200 per month and you’re receiving nothing. Imagine a friend repeatedly promising to pay you $200 on such-and-such a date and always failing to fulfill his obligation?

Can You Take Your Friend to Court?

In such a situation, you have a few choices, none of which are a great one;

  • You can keep hounding them about the money, which is likely to make you feel guilty and both you and your friend feel resentful after a while. The stress will build in both of you, and it is likely to have a very adverse effect on the friendship in every way you can think of.
  • You can write off the debt as lost, which many people can afford, but some people just cannot. If you can, it would be wise to do so if you want to keep the friendship.
  • You can take them to court. You can make a claim against them for the money they owe you, and you can get a judge to order the debt paid.

Taking a friend to court is an inexpensive way to deal with a friendly debt, financially speaking, but if you’re trying to avoid resentment, it is likely to be the least appealing choice. You will file a complaint in court, your friend will be served with a summons to appear in court, and you will have to air everything to the judge. This is why you should put the loan in writing; your friend will likely claim it was a gift and, if you don’t get the loan in writing, it will be harder to prove the existence of the debt.

The Boomerang Effect

While taking your friend to court will be terrible enough in itself, there is another factor to consider before filing suit to collect the money you’re owed. While the court will issue an order for your friend to pay you the money they owe you, it is entirely up to you to collect. That means hounding them for the money again or possibly using some of the enforcement mechanisms contained in the law to help you manage. You could, for example, file a garnishment against them, against their tax refunds or even their wages, to get your money back.

References and Sources

1. Erica Sandberg (2014). 8 Ways to Get Friends to Repay a Personal Loan. CreditCards.Com. Available at https://www.creditcards.com/credit-card-news/8-ways-get-friends-repay-personal-loan-1265.php

2. Bill Fay. Loan Agreements With Family And Friends. Debt.Org. Available at https://www.debt.org/credit/loans/friends-family/

3. Payment Calculator. Calculator.Net. Available at https://www.calculator.net/payment-calculator.html

4. Martin Lane (2018). Lending to Friends? Make Sure you Get your Money Back. Money.co.uk. Available at https://www.money.co.uk/guides/lending-to-friends-make-sure-you-get-you-money-back.htm

5. Geoff Williams (2018). A Guide to Borrowing Money From Friends and Family. Money.usnews.com. Available at https://money.usnews.com/money/personal-finance/family-finance/articles/2018-08-14/a-guide-to-borrowing-money-from-friends-and-family

6. Important Loan Terms You Should Know. Web.stu.edu. Available at https://web.stu.edu/Portals/Law/Loan%20Terms%20to%20Know.pdf

7. (2012). Co-signing a Loan. Consumer.ftc.gov. Available at https://www.consumer.ftc.gov/articles/0215-co-signing-loan

8. Amortization Schedule. Investopedia.com. Available at https://www.investopedia.com/terms/a/amortization_schedule.asp

9. How to File a Suit in Small Claims Court. RocketLawyerIncorporated. Available at https://www.rocketlawyer.com/article/how-to-file-a-suit-in-small-claims-court.rl