Finder may earn compensation from partners, but editorial opinions are our own. Advertiser Disclosure
6 ways to protect yourself when lending friends money
Did a friend ask to borrow money? Here's what you can do to get your cash back.
“Never lend friends money” is easier said than done. When you’re put in a situation where someone you care about is asking for help, it’s hard to say no. But no matter how much your friend needs, there are ways you can protect yourself when lending to a pal.
1. Lend the money in cash
Asking for money is one thing, but being asked to take a loan in your name or cosign for a loan is very different. If you’re going cosign, make sure you understand the risks and never put yourself in a position where someone could damage your credit score.
2. Create a written agreement and include worst-case scenarios
If you’re feel leery about lending, you could create a loan agreement that outlines when your friend should repay you. You should also include what happens if they can’t repay. Think about the possibility of them losing their job or having unexpected expenses that make them unable to repay the loan. Write these into the agreement so you’re both clear on the protocol.
3. Ask for security
Does your friend have a car, appliances or anything else that they’re willing to use as security? If this will put you at ease about the loan and your friend agrees, write the security into the agreement. However, remember they are still your friend, so it’s not a good idea to ask for their home as security — taking your friend’s house is a great way to sour a friendship.
4. Ask to be a shareholder or silent partner
If your friend needs money to start a small business you could ask to be a shareholder or a silent partner rather than just supplying the cash. This way, you could make more money if the business is a success or write off the loan as a bad investment if it fails.
5. Pretend the loan is a gift
Pretend the loan is a gift and only lend as much as you’re willing to lose. Your friend should still pay you back, but this may shift your attitude about the lending situation. You’ll be happy if the loan is repaid, but it won’t put too much of a dent in your finances if it isn’t.
6. Act like a bank
Charge interest on the loan and set in place fees if your friend makes a late payment. It’s important to set a reasonable interest rate and terms. Having these in place will make the agreement formal and show you’re serious about having the loan repaid.
You may be hesitant to lend money to friends, but there are ways to protect yourself. Just don’t forget to consult with a tax specialist to see how your loan affects your taxes come April.
More guides on Finder
Teaching kids about money: 9 ways to start
Fast-track your child’s financial literacy by learning how to teach your kids about money.
What should you do after your credit card application is denied?
Have you been ‘friend-zoned’ by every credit card you long for? Read what the experts have to say about pivoting towards success after your credit card application has been rejected.
6 ways beginners lose money day trading
Why you may want to think twice before day trading.
As household debt reaches record high, here’s how to stay afloat.
The clock is ticking on temporary debt relief and the big banks are bracing for pain; here’s what you can do.
Ask these 6 questions before getting a car loan
A few answers now can save you money on your car loan down the road.
How to get a loan to cover divorce costs
6 options when you’re struggling to pay your legal fees out of pocket.
9 ways to decide which roommate gets the best room
Whether you want a fair division of rent based on room size or a cross-city race for the prize, here’s how you can divvy up the rooms in your new place.
Golden Valley Lending installment loans review
Borrow up to $1,000 with this tribal lender — but keep an eye out for exorbitant fees.
Compare car insurance for multiple cars
Get the right coverage for homes with more than one car, like sharing cars with family or seasonal car use.
How to avoid a CD early withdrawal penalty
Want to withdraw money from your CD before it matures? Penalties apply, so check out this guide to CD penalties and how they will affect you.
Ask an Expert