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Lending Money to Friends – Important Things to Keep in Mind

Lending Money to Friends – Important Things to Keep in Mind

Have you ever lent money to a friend in need? It can be tricky territory, but it’s something we all should do if the situation comes up. Giving friends money is not as simple as just giving them cash and asking for it back because then there are legal ramifications. Lending money to friends is a complicated process, and some important factors must be remembered when considering whether or not to do so.

If either you or the friend you are helping no longer live in the same state, then some differences have to be remembered. The first is whether your state legally allows for friends to make loans to one another. If it does not, then you will have to find a creative way around this fact. Sometimes a friend can act as a loan guarantor if your state does not allow friends to lend each other money directly. In this case, you could give the money to them instead, and then they would repay it when your friend pays it back.

19 Things to Keep in Mind When Lending Money to Friends:

Here are 19 important things that you should keep in mind before lending money to friends. Everyone should know about these 19 things because it is not just about lending money, it is also about building a good relationship with your friends and it will help you make good financial decisions in the future.

1. Know Your Limits

You should never lend money to people you do not know very well. If you know that the person does not have the financial or emotional stability to pay you back, this is a red flag. Don’t assume that just because someone has a good job and seems trustworthy, they will be able to pay you back. Since it is your money at risk, you must know how much money the person can afford to borrow from you and how long they will be able to repay you with those resources. If you are unsure of someone’s financial stability, be hesitant to lend them money.

2. Know Their Debt-to-Income Ratio

The debt-to-income ratio is an excellent way to determine how much money the person has available to pay you back. If the person makes $100,000 per year and is paying 20% or more of their income towards debt repayment, then they will not be able to pay you back enough to make the loan worth it. It is also important that you know what type of debt they are trying to repay. If they are using a portion of their income to repay high-interest debt (such as credit card debt or student loan debt), then this will not be enough money to make the loan worth it. Try to avoid lending money to people with large amounts of interest and/or large outstanding credit card debts. These types of debt do not always come with a lower interest rate, so there is no reason to lend them money when they are not making enough money to cover what they owe.

3. Know Their Financial Situation

It is important that you understand the financial situation that person you think you know well is in. For example, it may be helpful to know just how much of the person’s income is spent on daily bills. If a person needs to pay for rent and food before they can make their car payment or student loan payment, then you will want to take this into account when determining how much money they should borrow. It is never a good idea to lend more than someone can pay you back within a month or two, depending on their income stream; if they need that money for rent, then you will want to keep them from having any more trouble paying rent. You must understand how much of their income goes towards paying bills before deciding how much money you are willing to loan out.

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4. Ask Why They Need It

It is important to find out why your friend wants the money. If it is to pay a bill, then great, but if they need the money to buy something they cannot afford, you need to think twice about lending them the money. It is important that you know the person’s intentions with the money and not just assume that they want to pay a bill.

5. Make Sure You Are Going to Get It Back

You should never lend money without expecting repayment. There is no reason to make a loan to someone you do not trust to pay you back. Set up a clear repayment plan and make sure that you understand everything there is about the loan. You should have a conversation about the type of loan, what repayment plans work best for both parties, and why payment is expected on time. You should be clear on how the person plans to repay the money. If they cannot afford to pay installments, then it may be better for them to borrow from a bank than from you.

6. Know That It May Be Difficult for Them

Loaning money can be very stressful for both parties involved, so make sure that both sides are prepared for this possibility. It is extremely difficult for a person to admit that they need money, and it can be very stressful for them to ask. The person you are lending the money to may be scared about how much it will cost and about how difficult it will be to repay you. Be sympathetic and make sure that you are clear about what will happen if they cannot pay you back on time. It is also useful to know that you may feel uncomfortable asking for repayment, especially if the two of you are close friends.

7. Have a Repayment Plan Ready?

The next thing you should do when lending money to a friend creates an easy repayment plan that both of you can stick with. You should both understand the plan completely and come up with a way to pay back the loan without either of you feeling too much stress. If one person is worried that they will not be able to pay you back, then they will not be able to enjoy the money and may make other financial mistakes to compensate for this worry. It is important that you set them at ease by having a clear repayment plan with set interest rates and a clear payment schedule.

If you are lending money to friends, then it is also important that you follow up regularly on how repayment is going. It is important to make sure that they are willing and able to repay you, so it can help to check in regularly. You should be clear about what will happen if they do not pay back the money (such as late fees or other types of debt collection). You should also not loan money to people that are struggling financially; there is no reason for you to have a stressful situation that may cause both of your financial problems even more. If someone needs help then it is better for them to seek out bankruptcy assistance instead of asking for an unfavorable loan from you.

8. Make a Legal Bond

It is important to verify that you have the right to collect a debt before lending money or giving a loan of any kind. You should make sure that you have documented evidence stating that you have the right to collect a debt (such as a document signed by the person who owes it) before making any payments or accepting repayment. The best way to do this is to hand over copies of all evidence in person. Lending money will ultimately become legally binding if the person taking out the loan does not pay back the debt in full, so you must understand this possibility and know how your legal rights will be affected by it.

9. Keep Relationships Separate

It is important to make sure that you do not mix your personal finances with business finances or family finances. For example, if you are in a relationship where both of you work for the same company, then it can be very hard to manage both your personal and professional lives at the same time. The best thing to do is separate your personal life from your professional life and try to manage them separately.

10. Know What You are Asking for

Lending money can be a lot of fun, but it can also lead to stress. You must think about how much money you want to make on the loan; this will help you decide how much interest rate should be paid. If you want to make a lot of money, then you must be clear about what it will take for you to collect the money back. If the person wants a one-time loan, it is best to set up a repayment plan and agree on a payment schedule together.

If you are keeping your life and work finances separate, then it is especially important that these are separate in your head as well. Think about how much money you want to make and how much time you want to spend on each; this will help you decide what kind of loan will be best in your situation.

11. Plan for Worst-Case

You should prepare yourself and plan for the worst-case scenario possible. For example, what will you do if the person borrows $500 from you and does not pay you back? Before lending the money, think about all possible scenarios that can happen and try to come up with solutions to the problems. For example, if a person asks for a loan for $500 but is only paying you back in instalments of $50, then it is better to make them pay it back in full so that they cannot fall further behind on their payments.

12. Learn How to Say “No.”

Suppose you are lending money to friends, then you should learn how to say no to them. Giving money makes it hard for people to handle, especially if they know that the two of you are financially close. If the person decides that they want $500 in the form of a loan, then it can be difficult for them to take this step, especially if they know that their relationship with you will be affected by this loan.

You should tell them that you cannot give them a loan and that they need to find other ways to get money. When someone asks for a loan of any kind, and you refuse, they may feel very bad about asking and may accidentally do things that make repayment more difficult or impossible.

13. Keep it Professional

You must keep the relationship with your friend professional whenever possible. For example, if someone asks for a loan and is close to you, then this can make you feel very uncomfortable and may cause a lot of stress situations where someone asks for a loan. You should tell them that they need to consider asking somebody else instead of asking you, or they need to try to find another way to get the money that they need. If your personal relationship makes it hard for you to give or not give loans, then it is better for friends not to ask from you in the first place.

14. Know When to Stop Lending

If the person you are lending money to does not seem likely to pay you back, then it is best to cut them off completely. This can be a sad thing to do, but it is better for you and your friend’s financial situation in the long run if they do not continue making money off of interest payments. It is also important that in this situation, you should try to help them find other ways of getting the money that they need, such as applying for a loan or borrowing from a family member. If the person continues to borrow money frequently, then talk to them and tell them that you cannot lend any more money because they are continuing to fall behind on their repayments. You also should know about essential money spending habits that will help you to build your financial condition strong.

15. Sign a Note

When you are giving someone a loan, then you must make sure that there is a written agreement between you. The best way to do this is to hand over the written contract in person or via email. You should also be sure to sign off on the loan and have your friend sign off on it as well.

You can use this document to make sure that you both agree on what will happen if they do not pay back their loan in full; even though there are no legal repercussions, it can be extremely embarrassing if they cannot pay you back. It is also good for documenting your agreement so that your personal relationship keeps things professional when all of the pieces are put together, and everything comes out right in the end.

16. Don’t Micromanage the Borrower

You should try to stay out of the way when someone is taking out a loan. Tell them they can contact you if they need help and get in touch with you at any time if they have questions, but it is important to let them handle the nitty-gritty details on their own. If you are paying attention to what they are doing, then there is more of a chance that something will go wrong between the two of you, and this might affect your personal relationship as well.

17. Learn When to Walk Away

If you are lending money to friends and it becomes clear that a person is not taking the loan seriously, then it is essential to walk away from the situation. They may ask you for money again at a later time, so this can test your patience, but you should try to stick to your guns and not give them any more loans. People need to learn that they need to take financial responsibility for their actions if they want to be successful in life, so let them learn this lesson on their own without your help.

18. Treat It Like a Business Deal

It is very important to treat lending money the same way you would treat any other business deal. For example, you should always pay the person back on time and not make any exceptions for them. You should also be sure to keep an accurate record of everything that happens and send invoices to the person so that they can pay you back every month. If you treat it like a business deal, then it will be easier for everyone involved, and there will be less stress in your personal life as well.

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19. Build Trust with Your Lender

You should always build trust with your lenders so that they can feel comfortable asking for favorable terms in the future. You must tell them how much money you want to make on the loan, as well as how long you need it to last. You should also explain how they can get the money back and what will happen if they decide not to pay back the loan. You should also make sure that the person understands how little you are making on their money; this will help them see that they can trust you with their money and that they need not be afraid that you might try to take advantage of them in any way.


In a nutshell, you should make sure that you can calculate how much money you will make off of a loan as well as how much money you will earn after taxes. For example, if you need a certain amount of money for rent and somebody comes to you for a check, then it is good to know whether or not they will need the money from their job to pay back their debt. This way, you will be able to determine whether or not it would be beneficial to give them the loan so that they can pay their bills.

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