Loaning Money to Friends

It is generally advised not to lend money to friends because if the money is not paid back you end up losing your money and your friend. Despite this I recently loaned my friend $2,000 to help buy a truck he is going to use for business.

I think this loan is a good deal for both of us and I am not worried about if for a couple of reasons. One is that I have known my friend for 14 years and feel confident that he will repay me. He has helped me out on a smaller scale several times in the past. Another is that the terms of the loan were clearly stated and we both understand them exactly.

He offered to pay interest and I am charging interest on the loan. I am making more than I would at the bank and he is paying less than if he had taken a loan from a bank. He may not have even been able to get a loan from the bank due to his poor credit.

There are very few people to whom I’d make personal loans. Especially if they were unsecured loans. Have you ever loaned money to a friend or would you? If you have done so, would you do it again?

15 thoughts on “Loaning Money to Friends”

  1. My experience loaning money to friends has been mixed. The very first time I loaned money to a friend was when I was 18 and I loaned $500 to a co-worker. She was going to pay me $20 every week for 30 weeks, so I was going to make $100 and she was going to put a down payment on a car so she could get to work. I was paid back $60 before she quit her job and moved away.

    I loaned $3,000 to my best friend a couple years ago, again as a down payment on a car. I charged a significant amount of interest and let him know our friendship would end if he didn’t pay me back. That loan worked out really well. We both agreed to the terms so I don’t feel bad about the interest I charged. He wouldn’t have been able to get the car without the loan and I had to tie up a rather significant amount of money. In the end it was a “win-win” for us both.

    Best of luck to you. I tried loaning money through to more than friends and didn’t have much luck. Once my loans are wound down (they have 3 year terms) I will be lucky if I break even.

    • Loaning money through Prosper is an entirely different thing. I’ve only made a couple loans through Prosper and I did get paid back. I’ve made a few more loans at Lending Club and despite one default I still have an 11% return. I’m going to continue put a small part of my money in peer to peer lending.

  2. There is nothing wrong with loaning money, if you truly know the borrower, have 100% faith in them, and can afford to lose the money.

    I have loaned to several friends over the years, friends who are earnest, have big hearts, work hard, but simply don’t understand savings and investment. Tiding them over for a year or two, financing a “new” (used) truck for their business, covering their licensing exams, and tuition or rent so they don’t get evicted – all of it was eventually paid back, and they are better people today.

    I would do it again. Well, actually, I have another loan outstanding since December, for my mechanic – “Cash for Clunkers” had a lot of unintended consequences.

  3. Never in a million years would I loan money to anyone. Too much trouble. I’m not cheap, I’m willing to help people in many ways that doesn’t mean giving loans. I’ve given friends going through tough times grocery gift cards for birthdays, instead of useless stuff. I’ve helped them find inexpensive legal help, or community help for problems.
    Everyone I know who has lent money to friends or family has come away burned and relationships damaged as a result.

  4. I lend a money to a friend and for more than a year now, she hasn’t paid me nor even try to call and say I can’t pay you right now etc. etc. it’s not actually a loan but from there I learn. I don’t think I’ll every have to do that again. I’d rather give you some cash if it’s really an emergency as help but not lend a huge amount. It will only ruin your relationship for some … but usually it’s different when you extend loan to a friend or anyone your close with.

  5. I did lend money to a friend who had financial difficulties. Instead the friend decided to buy himself a brand new laptop which he didn’t really need. I didn’t get my money back, and worst of all I also lost a friend ;-(

  6. I don’t loan money anymore. Period. I’ve come to realize that money has an uncanny ability to alter a relationship in a negative direction. Plus, good friends are hard to come by 🙂 And making a loan is kind of like insurance. You don’t know what kind of coverage you have until you try to cash in on it.

    Quite often I have given money to friends in times of need or just to help if someone is in a tight spot.

  7. I learned the hard way and will never lend money to a friend and expect to get back. I would just consider it a gift and make sure that I wouldn’t miss the money. If I get it back then that is a bonus.

  8. It looks like most people have had negative experiences with loaning money to friends. I think I don’t use the term “friend” as loosely as most people. The person I loaned money to is my only real friend and the only non-relative I would loan money. Just giving a friend money is a reasonable option if you can actually spare the money.

  9. I lent my best friend $1,000 to deal with a dire family emergency. I wanted to give more, but ultimately decided to only give her what I could afford to lose. She said she would pay me back in the Fall and I hope she does. However I’m budgeting like I’ll never get it back. My love for her and wanting to help is bigger than my need for that $1,000. Now, if I never get it back, chances are that would be the last loan between us, but we’ll still be friends.

  10. I’ve had good and bad loan experiences:

     The good—in my young and dumb days (junior/senior year of high school), I lent a coworker $1,000 in cash, had a written agreement on the terms of the loan which was $1,000 principle + $100 of interest (I forget how long it was supposed to mature). I received all $1,100 just weeks from starting the loan. Hurray for that!

    The bad—early of 2007, I heard about a peer-to-peer lending site called I dumped some “test money” in there to play around with, if I lost it, oh well, not a huge deal. As months would pass, I’d throw a little bit more into the pot since I had some positive results. Third quarter of 2008 (about 1-1/2 years after I started my prosper account), a different coworker/friend knew I was lending money on, she was curious how it worked, so i informed her, and then ended up on Prosper herself later, but on the borrowing side of the spectrum. I thought this would be a great way for me to lend her some money. I funded $600 of her $10,000 Prosper loan. I even posted a great reference on her page to help her loan get funded by other other Prosper lenders. I stated good things about her, all of them true. I knew her to be a very responsible person, which is why I was very surprised to finding out, just this last weekend, that she had stopped making her payments on her loan 12 months ago. I know, it took me a year to discover this. I’ve only logged into my account just a few times in last 18 months to transfer money out of Prosper, I just never bothered to check the statuses of my 250 or so loans since many of them were defaulting and it got depressing. But anyway, she made about 15 payments of a total of 36. I received a little over $300 of my $600. Which this totally explains why she was so quiet and withdrawing herself from me a year ago, but after three quiet months of her not talking to me, we were back to normal of being friends. But this whole time I just didn’t know until now. Since knowing of her default (now in collections) loan, I haven’t mentioned a peep of this to her, mainly because I don’t want it to get awkward again with her, and $300 is hardly anything to feud over. Just today, I saw her seeking someone out in the office to repay money to (maybe borrowed lunch money or something) and she said, “I hate owing people money,” and I couldn’t help but chuckle to myself at her statement.

    But back to the question of, “would I lend to a friend?” I don’t know, maybe i’ll give a small amount and consider it a grant instead of a loan.

    I’m still waiting for my dad to repay any of the $3000 I lent him 11 years ago. Though, he’s done so much for me, I’ve never bothered to seek payment, I probably owe him tons more.


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