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Updated on Thursday, March 17, 2016
There’s no real way around it — when someone comes to you to borrow money, it’s bound to be a bit of an awkward situation. Whether you have the money to dole out or not, it’s important to first recognize that the person coming to you is most likely in a vulnerable position, so start the conversation from a place of compassion.
If you’ve decided to go ahead and loan someone money, that’s a truly kind thing to do, but there are some things you can do for yourself, as well, to make sure you don’t get the raw end of the deal.
Here are a couple tips to consider when you’re confronted with the possibility of loaning someone some money.
Tip 1: Only agree to lend as much as you can afford to in cash
It doesn’t make sense for you to go into debt or mess up your own credit score to help someone else out of a bind, so if you’d like to help someone out with a loan, be sure that any amount you agree to is something you can afford to pay for in cash. (It’s even better to only loan money that you can afford to never see again, just in case that becomes a reality.)
Tip 2: If you share money with a partner, get his or her approval
If you’re married or in a relationship where you share finances with the other person, keep in mind that any money you loan isn’t just your money to give. Before deciding to dish out anything to a friend or family member, make sure that you have the approval of your significant other — and include him or her in any decision-making in terms of repayment plans — to do so. (And remember, lying about what you’re doing with joint money could be considered financial infidelity. Find out more about that here.)
Tip 3: Discuss other options
Ideally the person coming to you for the loan will have already exhausted other avenues, but if you sense that’s not the case, consider chatting for a while about what some of her other options might be to avoid the stickiness of borrowing from you. For example, if it’s debt they’re trying to pay off of a credit card, have they considered a balance transfer (here are some good offers)? If it’s cash they need for an immediate payout, what about a personal loan? (Learn about some of the best personal loan rates available online right here.) Only after you’ve discussed and ruled out these other options should you then start to discuss the possibility of lending money to them.
Tip 4: Talk terms, and get it in writing
Once you’ve decided to loan money, consider the exchange a business transaction and treat it as such. For example, put some thought into whether or not you’ll charge interest (not a bad idea, especially if the person admits they won’t be able to pay you back for quite some time), discuss how you expect to be repaid and by what date, talk about what will happen if the loanee becomes late with payments, and be sure to get everything in writing and have both parties sign. A verbal contract is generally considered binding, but that can get sticky, and depending on how much money you’ll be lending, you want to make sure your bases are covered and that you know you’re both on the same page by getting everything down on paper.
Tip 5: Let it go
Once you’ve made the decision to help someone out, it’s time to let it go. That’s why it’s so important to start out at Tip No.1, so that you’re not confronted every day with a loss of money that affects your bottom line. If you trusted this person enough to lend them the money in the first place, and you’ve done everything you can to ensure that you both understand the terms of the loan and that you’ll be paid back in full eventually, then you’ve done everything you can to put a solid loan in place, and that should be reassuring.
Tip 6: Learn from the experience
Once you’ve gone through the entire process of loaning someone money, take some time to consider how it made you feel, and whether or not you think you would do it again. The high you get from helping someone out might be worth everything in the end, but if you end up feeling awkward around the person or like it was a mistake to lend the money at all, then keep that in mind the next time (and there may be a next time, if word gets out you lent money in the first place) someone asks you for some cash.