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Lending a friend some cash? Here's how not to get burned

Loans

Loans Photo Credit: Clint Hild

In this economy, nearly one in four of us are turning to friends and family for financial help, according to the National Foundation for Credit Counseling. But mixing money and personal relationships can easily get awkward. Follow these tips:

Offer advice first
If a friend needs $500 to get through the next month, first try to learn what the money is for. Rather than writing a check with no questions asked, try to help your friend revise his budget and reduce spending.

Peer-to-peer loans
Tell your friend to visit sites like Prosper.com and LendingClub.com, which link individual borrowers with individual lenders. The interest rates on the loans are much lower than those at traditional banks.

Get it in writing
If you do choose to lend money out of your own bank account, put the agreement in writing for sums of $500 or more. Have a contract that lists the borrower’s and lender’s names, addresses, Social Security numbers, etc. Then describe the loan agreement — the dollar amount of the loan, the repayment schedule and any interest. Sites like Nolo.com and Legal Zoom.com offer basic legal templates from which you can create your own contract.

Consider it a gift
Finally, don’t forget that “loans” to friends don’t usually get paid back in full — even with a contract in place. The best way to emotionally prepare for this is to assume you’re giving a gift, not a loan. If you think you’ll end up resenting your friend, think twice before lending money. Your relationship is much more important.


Farnoosh Torabi is a personal finance expert, TV personality and best-selling author of “Psych Yourself Rich.” Follow her at www.farnoosh. tv and at Twitter/Farnoosh.

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