7 ways to aggressively protect yourself when lending friends money
Has a friend asked to loan a few bucks? Here's what you can do if you want to get your money back.
“Never lend friends money” is easier to say than to do. When you’re put in a situation where someone you care about is asking for help, this old adage usually goes out the window.
Whether your friend is asking for $1,000 or $100,000, there are ways you can really protect yourself when doling out the cash.
Ask to see their credit file
Everyone is entitled to order a free copy of their credit files once a year. If your friend has used their one free order, offer to pay for a fresh copy. Explain that the loan is a risk for you and having a better understanding of your friend’s credit position will reduce issues down the line.
Lend the money in cash
Asking for money is one thing, but being asked to open a loan in your name or to go guarantor on a loan is very different. Never put yourself in a position where someone could damage your credit score. If you are going guarantor, make sure you understand the risks and have sought legal advice beforehand.
Create a written agreement and include worst-case scenarios
You should create a loan agreement that outlines the amount of money being lent and 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 crop up that renders them unable to repay the loan. Write these into the agreement so you’re both clear on the protocol.
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 – causing your friend to lose their house is a great way to sour a friendship.
Ask to be a shareholder/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. This method requires some business savvy as you’ll need to make sure the business idea has a chance at succeeding.
Pretend the loan is a gift (to yourself)
If you really are worried about lending money to your friend, pretend the loan is a gift to them and only lend as much as you’re willing to lose. Your friend should still see the loan as something that needs to be repaid, but it will help to change 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.
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, but having these in place will make the agreement formal and show you’re serious about having the loan repaid.