A friend called wanting to borrow money. I knew I should say no

A friend called recently and, after some casual chatter about life and work, asked if she could borrow $2000 or more if I could afford it. She “hoped” to pay me back $20 a fortnight.

I knew straight away that I was going to say no. Don’t get me wrong. I care about her, but I only hear from her every couple of years, so we’re not close friends. And I knew I’d never see the money again.

I’ve also watched her make several dubious financial decisions over the past two decades. She owned a lovely house when we met, but sold it and lived off the proceeds, which has now all been spent. She now lives with her adult son, and has been in and out of casual work for years.

While I worry about her, she was about to start paid work again, and I knew family could look after her. I also have my own financial commitments, including school fees and a second teenager weeks away from getting braces.

On the other hand, I have another friend with a sick husband and three kids, and I’ve offered to loan her money anytime. She’s always declined.

Stretching the friendship

Mixing money with friendship carries a high risk of strain, awkwardness and resentment if repayment fails.

Ask Financial expert Melissa Browne, who agreed to loan almost $300,000 to a friend on the proviso that it was for six weeks. The money was intended as a bridging loan for a business. But it took several hard conversations and an agonising two-year wait for the money to be fully repaid.

“It was extraordinarily stressful because the money had been set aside for another purpose. I felt so stupid afterwards, but we were good friends, and you trust your friends when they say they will pay you back quickly.”

Remember, one of the biggest risks of loaning money to friends is the impact on the relationship itself.

Browne admits the situation damaged the friendship forever. “We still talk, but it’s strained things.”

The experience taught her never to loan such a substantial amount again. If she were to lend smaller amounts, she would get it in writing.

Risking a friendship

If you’re in the same position, make sure you’re looking after your own financial needs first. Consider how much money you have coming in, bills and living costs, savings goals and what you can give without being left short.

Before lending money, consider whether the money will actually help them, says Deb Shroot is a financial counsellor at Financial Counselling Australia.

Only lend money to a friend if you can genuinely afford not to be repaid.

“While your friend may have every intention of repaying you, their circumstances may make that difficult or impossible,” Shroot says.

It’s also worth considering whether a loan addresses the underlying problem. “For some people, access to hardship arrangements, emergency relief, government assistance or other supports may be a more sustainable solution.”

Remember, one of the biggest risks of loaning money to friends is the impact on the relationship itself.

Lending money between friends can be highly emotional. Even when everyone starts with the best intentions, disagreements about repayment, changing circumstances or unmet expectations can place significant strain on a friendship.

If you’re in a position to help a friend who might be struggling, firstly consider whether a bank would loan your friend money. If the answer is no, there’s probably a good reason.

Also, consider whether your friend is generally financially responsible, and whether this is just a one-off crisis, or if it demonstrates a broader pattern of financial irresponsibility.

Golden rules for lending money to friends:

• Only lend what you’re prepared to lose: There is possibility that your friend won’t pay you back, which could leave you short.
• Consider lending less: You are under no obligation to lend the full amount. Consider how much you’re prepared to loan, if any, and be prepared to say no.
• Know how your money will be spent: Ask what the money will be used for. If your friend wants to use the funds to buy something frivolous, it’s OK to say no.
• Be clear it’s a loan, not a gift: If you’re loaning the money, make it clear that the money is a loan, lay out the terms of the loan and the repayment terms in a loan agreement that details any interest rate charges and borrower’s responsibilities.
• Consider the tax implications: It might be worth checking with your tax adviser to understand if you will incur a tax bill on the loan.

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