Lending money to friends: Is it a good idea?

How do you feel about lending money to friends?

A survey by comparison site Finder reveals that many Australians are owed money by friends. While the majority of Aussies (62 per cent) haven’t actually lent money to friends, a significant proportion of the 38 per cent who have are still owed money.

In many cases, the debts are quite small. It might be a split dinner bill or taxi fare, or perhaps the shared cost of a gift. But some debts are bigger – holiday expenses, even gambling debts.

Depending on the relationship and the amount – or perhaps both – this can result in uncomfortable moments in a friendship. Debts between mates have been known to fracture friendships, sometimes beyond repair.

The lender of the money can be forced into making a difficult decision, one they should not have to make. They can choose to say nothing and ‘write off’ the loan as a loss. Or, they can bring the subject up with their debtor friend.

One option leaves them in a position of having lost money. The other leaves them with the prospect of a confrontation or, at the very least, an awkward discussion.

I must confess to having some experience in scenarios such as this, both as lender and borrower.

Lending money to friends

Many years ago, a work colleague, John (not his real name), went through a marriage break-up that left him a broken man. He stopped coming to work, such was his state of distress, and eventually lost his job.

Having lost his wife and job, John’s problems were compounded by mounting debts. As a friend, though not a close one, John asked me if I would lend him some money. The amount was around the $150 mark, from memory. At the time, the early 1990s, this was a reasonable sum of money.

I may have hesitated briefly, but I agreed to lend John the money. In doing so I made a mistake. That mistake was not the act of lending John money, it was not discussing the matter with my wife first.

Weeks, and then months, went by. I lost contact with John. At some later point, when my wife and I had a small, temporary financial crisis, she angrily reminded me of that unpaid loan. Given that we shared our finances, her anger was fair enough. For me that was a lesson learnt. If I was to lend money again, I should do so after consulting with a finance-sharing partner.

A year, maybe even two, went by without a word from John. Then one day an envelope addressed to me arrived in the mail. Inside was a cheque for $175, payable to me. “$150 plus interest,” said the accompanying note from John, who had put his life back together.

Borrowing from friends

Around two decades later, I found myself in John’s position. My marriage ended and I went through a period of devastation. As it had John, the distress affected my ability to work. Like John, I missed periods of work and fell into financial difficulty.

Cap in hand, I approached a number of family members and friends over the next few years, asking for a loan. Every single friend said yes. The amounts were not insignificant, and they took me some time to pay off. Far longer than I had hoped or anticipated.

In my mind there was never any doubt I would repay those loans. In hindsight, though, I can see one thing I did that was unfair to my friends. When I was struggling to pay them back at the agreed time, I said nothing. This probably left them wondering if they would in fact be repaid.

I could have, and should have, kept my creditor friends informed, but I did not. Why? Shame. Shame at not being able to keep my promise (on time at least), and shame that I, a supposedly reasonably intelligent person (though some might disagree), could end up in such a mess.

The loans were paid in the end, and the friendships remain strong.

Should you lend money to a friend?

That’s really a question only you can answer. As a lender, perhaps I got lucky with John. As a borrower, I repaid my loans, but not in the agreed time frame.

My advice would be this: make sure you can afford to lend the money, and keep the lines of communication open with all parties involved.

The note John wrote when he repaid the money I’d lent him made it clear that my favour had played an important part in his recovery. Equally, the loans generously given to me in my time of need played an enormous role in rebuilding my life.

Lend with caution, knowing that there may be risk involved, but that you could be helping someone rebuild their life.

Have you lent money to a friend? Based on your experience, would you do it again? Let us know in the comments section below.

Also read: Find the resources to get yourself out of debt