Many of us have been asked at some point by a friend (or two) to loan them money. I've had experiences where there was no issue getting the money back and a couple of instances where it was problematic. There's never really an easy answer as to whether or not you should loan money to your friends. Our first instinct is to say yes, but then there's usually warning bells that go off that signify it's a potentially hazardous situation. Before you even give a response, there are several do's and don'ts to consider that can help you decide if loaning your friend money is the right decision.
Do ask why the friend needs the money
There's not even a reason to consider loaning the money if you're friend isn't going to tell you what it's for. Get all the specifics and listen to your gut to decide if the person is telling the truth. I once loaned a friend money for a specific purpose only to find out that the money was used for something else. I had a feeling she wasn't being upfront but I loaned her the money anyway. Lesson learned.
Don't lend more than you're willing to lose
I cannot stress enough that you shouldn't loan more money than you're willing to lose. Consider it like gambling; you might get the money back but you also could end up empty-handed. You don't want to loan the friend money only to constantly be annoyed when you're not getting it back.
Do be clear about what you expect in return
Want to charge interest? Expect the loan back within a certain time frame? Let your friend know what you expect, but also be clear about what could happen if the terms are not met. It sounds harsh, but it's your money and you have the right to set the terms of repayment any way you wish.
Don't make a hasty decision
Rather than whip out your checkbook right then and there, take some time to decide what you want to do. Don't let your friend rush or bully you into making a decision either. If they really respect you and need the money, for the exception of some very few instances, they'll let you take the time you need to make your decision.
Do decide whether it's a gift or a loan
You may want to forgo the whole loaning process and gift the money instead. This is a good option to consider if the person is important to you, if you know the person is trustworthy and respectful and most importantly, if you can afford to give the money as a gift. It's not for everyone, but it's still an option to consider.
Don't hand over cash
Loaning someone cash, especially if you expect it back at some point, is one of the worst things you can do. If there's a problem down the line, there's no record of the transaction and what exactly it was for. Hand over a check instead and in the memo section, put whether it's a loan or gift and if possible, the reason for giving the person the money in the first place.
Do write up a contract
Never, ever loan someone money unless you get all of the terms in writing along with both your signatures at the bottom of the page. Detail everything in the contract from the amount of the loan to when you expect it to be paid back. Don't let your friend get mad and tell you the contract comes across as a lack of trust. It's all about protecting you, your friend and your friendship while ensuring that both of you are on the same page.
Don't go above and beyond to loan the money
If you don't have the money readily available, don't loan it to your friend. This means not dipping into your savings, borrowing from your retirement account, borrowing money against your house or borrowing money from someone else. You shouldn't stretch yourself financially to loan money to a friend so their money problems can be fixed while you now have to worry.
You may loan your friend money with good intentions, but you don't want to get screwed over in the process. A true friend will be willing to go along with reasonable terms you set, including signing a contract and accepting a pay back date, if they respect your friendship and appreciate your gesture. Don't let them tell you otherwise.