Should you lend to cash-strapped friends?

Many of us can relate to counting the last few rands towards month-end, hence we can sympathise when we receive a loan request from a cash-strapped friend.  

We look at the impact of these requests on your friendships, and we consider the value of drawing up a contract to ensure your money is returned.  

Tip: Debt consolidation may be a lifeline for your cash-strapped friend.

Don’t let it impact your friendship

We may not think much of lending a small sum to someone we know and trust. It may seem reasonable to expect that they will return the money when they can. However, when this expectation is not met, it can lead to resentment and it may jeopardise your friendship.

Giles Maynard, wealth manager at Carrick Wealth, advises against lending money to friends. He notes that if you choose to go ahead, you need to be comfortable with forgoing what you lent.   

“It’s highly unlikely that your money will be returned, and you should make sure you have this expectation in mind if you go ahead,” says Maynard.

He points out that, generally, when you lend money to friends it’s to help them out of a bind, and if they don’t pay you back it shouldn’t upset your friendship.

“The upside is that if you’re in need of financial help and you’ve lent money to someone, chances are they will be open to assisting you in return,” he says.

READ MORE: Split the bill, not the friendship

Draw up a contract

Maynard says that the only way to ensure your money will be repaid is to draw up a formal loan agreement. This should be considered when you are lending larger sums.

“You can download a sample agreement from the internet, or get a lawyer to assist you to ensure there is a clear understanding as to the terms of repayment,” he says.

If your friend needs to borrow a large amount of money, it may be better to advise them to borrow from a financial institution, such as a bank or a loans provider.

Tip: A personal loan may be a better solution than borrowing from a friend. To apply, click here.