Lending money to a friend?

[dude]

So a friend of mine just had a recent spate of bad luck, and a $4K or so loss is going to cause him hardship. I offered to lend him the money, because I have plenty.  He and his wife don't make a ton, and they aren't exactly financially savvy (even though he is a super-smart guy). He gets occasional contracting jobs a couple times a year that pay him a pretty good sum. He's an honorable guy and I'm pretty sure he'd pay back the money.  I have some misgivings about lending to a friend, because I don't want it affecting the relationship, but he needs the help.

So I ran it by my DW, and she's totally fine with helping out a friend, but she has asked that I get something in writing from him, like a promissory note or the like, for the loan.  I feel really weird asking for something like that, and feel like it'll make my good faith gesture to a friend seem more like a business transaction.  I basically told him, I'll lend you the money, pay me back as you can.

Thoughts?  Has anyone here lent money to a friend and required something in writing acknowledging the debt?

[TheAnonOne]

You and your wife are generous and thoughtful.  Best thing to do if you really want to help this guy and you don't want to jeopardize the relationship, is to just give him the $4k, no strings attached.

Or a hybrid approach. Loan it, if he has issues paying, just forgive whatever he is missing.... I have done this before, seems to work pretty good and you get to seem like the good guy twice! (Assuming they default)

[Frankies Girl]

The big thing to ask yourself is if your friend can't or worse won't pay you back, how will that make you feel about your friendship? Money is a quick way to screw up something like this. All it takes is for him to start avoiding you, telling you he can't afford to pay you anything this month, this week, this year... and then telling you to get off his back or even cut you off eventually because he's angry and embarrassed that he still can't pay you the money.

If he's got a track record of being poor with money, what makes you think he's going to be suddenly good with it when you give it to him? You are trusting that he can make a complete change from his standard MO, just based off the fact that he might value your friendship higher than other transactions.

I would see it as a friend not valuing the friendship and be pretty upset and hurt if I gave someone even a few hundred and they never made good on it. That's one of the reasons that you hear about never lending money - gift an amount that won't make you feel hurt and angry if they never pay you back.

But a loan of $4k is way outside my comfort zone personally and I wouldn't do it except for my very closest dearest friends and yes, I'd still ask for a promissory note. Whether I enforce said note is another matter all together, but I would want the piece of mind that the friend recognizes that there is an obligation to accepting the loan from me.

And you should have discussed with your wife first before offering; the least you can do now is to ask him to sign a promissory note since that's what would make her comfortable with the idea of lending the money.

[EricP]

Why not on top of the loan, offer financial coaching?  Or does that come across too pretentious/condescending?

[forummm]

Be happy with never seeing a penny of it back. And be OK with him feeling so bad about it that you are no longer friends (because it's awkward for him to be around you).

[ioseftavi]

LendingKarma.com. 

Get it in writing, and put a formal payment schedule in place (even if it's not too aggressive, like he pays you the 4k back in monthly installments over 2 years @ $175/month).

We just loaned $10k to a very responsible friend.  I am almost certain we'll be in good shape with regards to being paid, but I am SO glad we put everything in writing so that all parties are clear on expectations.

If you don't desire this level of detail, fine, but then admit to yourself that this really isn't a "loan".  It's very likely to be a gift, or an extremely unprofitable loan that drags out long into the future and becomes a burden.

Also, I'd second the idea about financially coaching this person, if they're willing to work with you a bit.  Just helping them change 1 or 2 major habits is likely to be a big boost to your friend's financial stability.

[Seppia]

It would mainly depend on two points:
- how much do you really trust your friend to pay back?
If it's 100%, I wouldn't care if he does it in a month or five years, if he's a friend I am willing to "forget" interest rates in order to help him.
- how would him/her not paying back affect your friendship?

[Terrestrial]

I wouldn't ask for a note because I wouldn't loan any money that I would be upset about not getting back, and I would only loan to friends/family that were close enough to me that I value the relationship and being able to help them more than the money.

For 'acquaintences' or even 'casual friends' where I feel like I would have bitter feelings and need a formal agreement...I would rather just not do it and not deal with all the BS that might go along with it.   I agree with the person that said you would also need to be okay with him pulling back on the friendship because he might be ashamed if he can't pay it back on the 'schedule', especially if you formalize them.

For what it's worth, the seldom times I have 'lent' family/friends money I have just given it to them with no strings attached.  As they are also honorable people like you have described your friend, they have remembered that and given my money back each time when able (small sample size).  I fully realize this is not the case with everyone.

Your wife saying that she wants a note kind of indicates she would NOT be okay with not getting paid back...so perhaps you should decline and try and help in other ways if possible.

[Terrestrial]

If you don't desire this level of detail, fine, but then admit to yourself that this really isn't a "loan".  It's very likely to be a gift, or an extremely unprofitable loan that drags out long into the future and becomes a burden.

Who tries to make a 'profitable loan' to a good friend whose in a bad spot.  Geez...

[ioseftavi]

Who tries to make a 'profitable loan' to a good friend whose in a bad spot.  Geez...

[raises hand] Zero shame about it, thanks.

This wasn't a friend in a bad spot, by the way.  I wouldn't be making loans with an eye towards profit if someone was going to be out on the street without my assistance.  This was a loan, not an act of charity.

[DoubleDown]

One way to get it in writing without coming off as a jerk is to appeal to possible unexpected calamity and making sure your spouses are covered in case something happens to either one of you. For example, if he dies, you and your spouse would be able to get the loan back from his insurance/estate without looking like vagabonds who just showed up claiming to be owed something. If you die, your spouse would have something in writing to understand how the loan should be repaid.

[Blonde Lawyer]

The big thing to ask yourself is if your friend can't or worse won't pay you back, how will that make you feel about your friendship? Money is a quick way to screw up something like this.
...

I would see it as a friend not valuing the friendship and be pretty upset and hurt if I gave someone even a few hundred and they never made good on it. That's one of the reasons that you hear about never lending money - gift an amount that won't make you feel hurt and angry if they never pay you back.

Our society has taught us complex things about money and we deeply tie our emotions to it.  I didn't think I would take money things so personally but for some reason, they really itch at me sometimes.

We had pretty pricey tickets to a comedy show.  At the last minute, we had out of town family visit so we couldn't use the tickets.  We were going to sell them and recoup our loss.  A friend was also going to the show and said he had two friends that would buy them.  So, we gave him the tickets.  Only one of those two friends showed up and the one that did never paid our friend.  Our friend felt bad and was going to pay us for the tickets but my husband didn't want to accept the money since it was the third guy that stiffed him.  I'm just pissed because we could have sold them.  I'd even be okay letting the no-show ticket money go to waste but I can't get over letting some third party I've never met use my ticket for free.  I don't want my friend to have to pay this third party's share.  I want my friend to go after his friend for the money and then give it to me.  Clearly if we were spending the money we don't really need it but it is just the principal.  I'm sure I would take it far worse if it were a lot more money.

[bdc]

One thing to consider: documenting the loan would make it easier to substantiate as a tax deduction if the money never comes back. http://www.irs.gov/taxtopics/tc453.html

[Dexterous]

I've never loaned money, only gifted it.  My loan criteria would be stricter than most banks, and I don't want in that business.  :)

[Seppia]

We had pretty pricey tickets to a comedy show.  At the last minute, we had out of town family visit so we couldn't use the tickets.  We were going to sell them and recoup our loss.  A friend was also going to the show and said he had two friends that would buy them.  So, we gave him the tickets.  Only one of those two friends showed up and the one that did never paid our friend.  Our friend felt bad and was going to pay us for the tickets but my husband didn't want to accept the money since it was the third guy that stiffed him.  I'm just pissed because we could have sold them.  I'd even be okay letting the no-show ticket money go to waste but I can't get over letting some third party I've never met use my ticket for free.  I don't want my friend to have to pay this third party's share.  I want my friend to go after his friend for the money and then give it to me.  Clearly if we were spending the money we don't really need it but it is just the principal.  I'm sure I would take it far worse if it were a lot more money.

Wow that sucks, sorry to hear that.
When third parties are involved my rule is cash in advance.
You pay me, I give you my stuff, whatever it is.
If it's a friend I know and trust he can get me the money back whenever he wants (which is usually pretty fast, that's why he/she is a trusted friend in the first place)

[plainjane]

So a friend of mine just had a recent spate of bad luck, and a $4K or so loss is going to cause him hardship. I offered to lend him the money, because I have plenty.  He and his wife don't make a ton, and they aren't exactly financially savvy (even though he is a super-smart guy). He gets occasional contracting jobs a couple times a year that pay him a pretty good sum. He's an honorable guy and I'm pretty sure he'd pay back the money.  I have some misgivings about lending to a friend, because I don't want it affecting the relationship, but he needs the help.

How would you feel if you knew your friend was spending some of his contracting money on going out while he still owed you?  Went on vacation?  Bought new clothing?  What priority are you hoping paying back this loan will be for him?  If you're only "pretty sure", then assume it is a gift and treat it like that.

If you want it to be a loan, then set up a repayment schedule in writing.

[immocardo]

The big thing to ask yourself is if your friend can't or worse won't pay you back, how will that make you feel about your friendship? Money is a quick way to screw up something like this.
...

I would see it as a friend not valuing the friendship and be pretty upset and hurt if I gave someone even a few hundred and they never made good on it. That's one of the reasons that you hear about never lending money - gift an amount that won't make you feel hurt and angry if they never pay you back.

Our society has taught us complex things about money and we deeply tie our emotions to it.  I didn't think I would take money things so personally but for some reason, they really itch at me sometimes.

We had pretty pricey tickets to a comedy show.  At the last minute, we had out of town family visit so we couldn't use the tickets.  We were going to sell them and recoup our loss.  A friend was also going to the show and said he had two friends that would buy them.  So, we gave him the tickets.  Only one of those two friends showed up and the one that did never paid our friend.  Our friend felt bad and was going to pay us for the tickets but my husband didn't want to accept the money since it was the third guy that stiffed him.  I'm just pissed because we could have sold them.  I'd even be okay letting the no-show ticket money go to waste but I can't get over letting some third party I've never met use my ticket for free.  I don't want my friend to have to pay this third party's share.  I want my friend to go after his friend for the money and then give it to me.  Clearly if we were spending the money we don't really need it but it is just the principal.  I'm sure I would take it far worse if it were a lot more money.

I really hope this pun was intentional. Principal would mean that you really do care about the money.  Principle would mean that it's more a concept.

[GizmoTX]

OP, banks do loans. You are not a bank. It will cost you to try to enforce a note, & even then it can be uncollectable. $4K is a big amount to be suddenly short on.

Unfortunately, you will likely experience a change in this person's behavior towards you whether you say yes or no, unless it's an outright gift. Only you can decide if you have so much money that you & your wife are OK with this.

[Cathy]

... It will cost you to try to enforce a note ...

The mitigation to this problem is to include in the note that the debtor will pay any collection fees in case of default, including attorney's fees, costs, disbursements, or whatever the appropriate language is in your jurisdiction ("costs on a solicitor-and-own-client basis" in Canada). Obviously if the person has no money, you won't be able to collect these fees either, which is why it's only a "mitigation".

By the way, a promissory note is a bit more than a mere acknowledgment of debt. As the name suggests, it's a document through which the debtor "promises" to repay the amount (not merely acknowledges that the debt exists). The difference actually matters for some purposes because a promissory note, subject to certain restrictions, is a negotiable instrument, whereas a bare acknowledgement of the debt might not be.

One advantage of having a negotiable instrument is that you can sell it to a third party with relative ease, e.g., to a third-party buyer of junk debt. In theory, you can sell non-negotiable instruments too, but in practice you won't be able to do so, because with a non-negotiable instrument, the purchaser is taking the note subject to any legal defences that the debtor might have against the creditor (which might allow the debtor to avoid payment). With a negotiable instrument, the purchaser takes on no such risk (other than the risk that the note is a forgery or otherwise fraudulent or illegal; obviously the alleged debtor cannot be bound by an instrument that they didn't actually sign or that is otherwise illegal).

[supomglol]

Only loan money you are 100% O.K. with never seeing again.  $4K is not really a small amount of money. 
That being said, I would have happily paid $4K to find out the true character of some people sooner than I eventually did. 

[Digital Dogma]

4k seems like a lot, is there anything you could do in the meantime to lighten your friends burden without going all out and providing unearned cash for him that you may never see again? For example, if hes 4k in the hole because his car failed, perhaps offer him the use of your vehicle under certain conditions?

The way I see it, being 4k in the hole is a great motivation to buckle down on spending and create more efficiency, if you know your friend will just bail you out with no need to pay them back maybe thats counter-productive to your ultimate goal of helping your friend avoid continued financial hardship?

Tough spot you're in. I'm extremely hesitant to lend or give money to friends because I know they're capable of earning on their own and I don't want to seem patronizing. Instead I try to leverage their skills among my network of friends and family for small jobs and pay them well for their expertise. Can your friend do 4k worth of work for you that you've been wanting to complete anyway?

[Cathy]

I don't want my friend to have to pay this third party's share.  I want my friend to go after his friend for the money and then give it to me.

Those propositions are not mutually inconsistent. By paying you for the other friend's debt to you, the first friend was essentially purchasing the right to enforce the debt against the latter friend. He could then proceed to collect the debt against the latter friend, e.g., through small claims court. If I were you, I would have accepted the amount from the first friend. It was a fair resolution.

Alternatively, perhaps you could analyse it differently. Perhaps when you gave the tickets to the first friend, he became indebted to you for the value of both tickets and any complaint he has with not being able to sell them is his problem alone. Under this analysis, he owes you the value of both tickets, not just one of them.

In the first analysis, the first friend was essentially acting as an intermediary and never purchased the tickets himself. He has no debt to you, and is just voluntarily purchasing the rights to somebody else's debt. In the second analysis, he purchased the tickets from you and was not a mere intermediary. Either way, I would have accepted money from him.

[DoubleDown]

So a friend of mine just had a recent spate of bad luck, and a $4K or so loss is going to cause him hardship. I offered to lend him the money, because I have plenty.  He and his wife don't make a ton, and they aren't exactly financially savvy (even though he is a super-smart guy). He gets occasional contracting jobs a couple times a year that pay him a pretty good sum. He's an honorable guy and I'm pretty sure he'd pay back the money.  I have some misgivings about lending to a friend, because I don't want it affecting the relationship, but he needs the help.

How would you feel if you knew your friend was spending some of his contracting money on going out while he still owed you?  Went on vacation?  Bought new clothing?  What priority are you hoping paying back this loan will be for him?  If you're only "pretty sure", then assume it is a gift and treat it like that.

If you want it to be a loan, then set up a repayment schedule in writing.

This is a really good point. I once loaned this exact same amount of money ($4k) to a very close relative who was in dire straits, and did not come for help until it was an emergency (as in, they had been laid off over 6 months ago and had been ashamed to mention it, and now they would get kicked out of the house they owned in 2-3 days if no payment was given).

About 4-5 years later when I still had not seen a cent, I became pretty annoyed when they were telling me about all the other things they were doing, like buying rental houses, investing in this and that, remodeling their own kitchen, etc. I reminded them they owed me the $4k, and they acted surprised that I brought it up -- as in, "Oh, you wanted to be repaid now? I was just going to add it to your inheritance." I said, "No, I'd really rather have the money now so I can do things with it." They repaid me right away after that, at least.

[K-ice]

My DH loaned about 2K to a school lab mate, and did get it all back.

But I would definitely have something in writing and perhaps a spread sheet with a pmt schedule.

As his DW I would have been totally ok with him saying I am the bad cop insisting on the note. But if I recall, they both mutually wanted the terms clear.

You can say something like:

"Sorry man my wife's (and I are) picky about this kind of stuff and wants you to sign this note. I will give you a reciept every time you make a payment. I figure with your next few contracts you will have this paid off in no time. Does this payment plan look reasonable? You can pay me back in full earlier if you want."

Little carbon copy reciept books are still easy to find at stationary stores.
Be prepared to be kind of bitter when you see your friend buy new stuff and go out for beers when you are not yet paid in full.


Without a note or anything I would say your friend either has no respect for money, or you, or both.

[Blonde Lawyer]

I don't want my friend to have to pay this third party's share.  I want my friend to go after his friend for the money and then give it to me.

Those propositions are not mutually inconsistent. By paying you for the other friend's debt to you, the first friend was essentially purchasing the right to enforce the debt against the latter friend. He could then proceed to collect the debt against the latter friend, e.g., through small claims court. If I were you, I would have accepted the amount from the first friend. It was a fair resolution.

Alternatively, perhaps you could analyse it differently. Perhaps when you gave the tickets to the first friend, he became indebted to you for the value of both tickets and any complaint he has with not being able to sell them is his problem alone. Under this analysis, he owes you the value of both tickets, not just one of them.

In the first analysis, the first friend was essentially acting as an intermediary and never purchased the tickets himself. He has no debt to you, and is just voluntarily purchasing the rights to somebody else's debt. In the second analysis, he purchased the tickets from you and was not a mere intermediary. Either way, I would have accepted money from him.

Great analysis, Cathy.  The friend at issue works with my husband so he was the one having the conversations and he was the one that refused the money.  I likely would have accepted it if it were offered to me.  Personally, I think they owe us for both tickets but our friendship is more important than the money.

As to the principal/principle typo, just a typo. 

[Drifterrider]

One doesn't "lend" money to a friend:  one gives.

A friend gives it back at some point.

[BrandonP]

I would only feel comfortable lending close family members this type of money.

I remember a friend asked to borrow $500 and I refused. I actually moved city, and never saw him again! Very glad I didn't lend that $500!

note. the $500 didn't break the friendship. He wasn't a best friend or anything like that.

[Bolshevik Artizan]

I have just given a loan of $5000 to a friend. I agree with those above who say a) don't lend it if you can't afford to lose it and b) don't see it as a loan, see it as a gift. This friend assures me he will pay it back. If he doesn't, that's OK; if he does, so much the better. I am grateful that I have enough abundance in my life to be able to help this person; if I hadn't helped him, he might have lost his house as he has 100% mortgage, credit card debt and two lines of credit maxed out on his house... oh and three children and a wife who doesn't work. The children's futures alone are worth $5000 to me. Bolshevik

[mtn]

I often thought about this. I'm afraid it will happen with my in-laws. I've come to the conclusion that I will never lend them money. I will give them money, IF they let me do an audit on their expenditures and they agree to eliminate what I deem unnecessary (i.e. fancy cell phones, cable tv, and the meals out).

Oh, and they'd have to cut up their credit cards.

[Bolshevik Artizan]

I often thought about this. I'm afraid it will happen with my in-laws. I've come to the conclusion that I will never lend them money. I will give them money, IF they let me do an audit on their expenditures and they agree to eliminate what I deem unnecessary (i.e. fancy cell phones, cable tv, and the meals out).

Oh, and they'd have to cut up their credit cards.

I sympathise with you. I gave my in-laws reduced rent for two years then let them live with us for nothing. I snapped when I ended up also paying for them to eat out in restaurants, buying them fridges, cookers, etc and they complained about the price of everything in Canada (they are from Scotland) - in the end, I've decided that one's spouse, parents, siblings, children and pets, etc, are more or less the reasonable limit of your responsibility. It's not your fault, or anyone else's, if your in-laws/brothers/sisters-in-law can't run their finances, and you (probably) have enough responsibilities of your own to deal with.

BA