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When friends or family members ask to borrow money, I walk through six questions to decide.
If I have the money available, I ask myself if I care if it’s repaid, and if non-payment would hurt the relationship.
I also think about how the money will be used, and then set repayment terms.
In the fall of 1993, not long before my 14th birthday, I went with my dad to see “A Bronx Tale” at the multiplex near our house. One scene that left an impression takes place when the protagonist, Calogero, spots a guy named Louie who owes him $20. From across the street, Calogero bellows at Louie to pay up, hurling threats and obscenities while Louie hurls back excuses and scurries away.
Calogero’s mafioso mentor, Sonny, sees this confrontation play out and intervenes. “Is he a good friend of yours?” Sonny asks.
“Nah,” Calogero replies, “I don’t even like him.”
Sonny counters with a bit of prize advice that has stuck with me ever since. “Look at it this way,” he fires back. “It cost you $20 to get rid of him. He’s never gonna bother you again. He’s never gonna ask you for money again. He’s out of your life for $20. You got off cheap, forget it!”
Sonny’s lesson was eye-opening. More than a simple strategy for cutting unwanted ties, it taught me that being owed or indebted is about far more than payments and balances.
Lending and borrowing money has social, ethical, legal, and other ramifications to go along with the financial ones, and ignoring any of them can create problems. That’s why when someone asks me for a loan (or when I occasionally need to ask for one myself), I try to look at the big picture. Here are the factors I consider.
Do I care about being repaid?
I often prefer giving to lending, especially for smaller amounts. If a friend forgets their wallet when we’re out to lunch, I’d rather make it my treat than loan them their share of the bill with an expectation of repayment. I figure kindness like this tends to even out, but even if it doesn’t, I’d rather extend a little goodwill than track every time someone owes me a few bucks.
This approach works for most of my everyday dealings with friends and family, but I try to keep in mind not everyone shares my perspective. I know some people who are doggedly principled about repaying even the tiniest sum, so while I might not care about whether I get paid back, they do. If reimbursing me is that important to someone, I don’t quarrel about it; I’m not going to force my hospitality on them.
Can I afford to lend the money?
Naturally I can’t lend money I don’t have, but just because I have the money doesn’t mean I can (or should) lend it.
Years ago, a friend asked to borrow $4,000 as a bridge loan for her business. I was confident in her intent and ability to pay me back promptly, but at the time, that amount comprised most of my liquid funds. I would have been in a tight spot if I had suddenly needed the money — like if I lost my job or had to replace my car. As much as I wanted to help, and even though the loan was short-term, I didn’t think exposing myself to that risk was prudent.
That experience helped me articulate a foundational rule for myself: If lending someone money might imperil my own finances, I don’t do it.
If I expect repayment, how likely am I to get it?
I’m not a bank, so I don’t scrutinize personal loan requests the way an underwriter would a mortgage application. But I’m also not a charity, so when I loan money, I have to at least consider the potential for default.
Unlike financial institutions, I put more stock in social credit than I do in quantifiable criteria like assets and repayment history. Social pressure can be just as compelling as a written contract, which makes me a lot more confident about getting repaid by people in my circle. I’ll loan money to my closest friends and family without a second thought, but that circle also extends to a larger community.
Case in point: I once covered a few hundred dollars of expenses for an acquaintance on a road trip with the understanding he’d pay me back when we got home. Collecting that debt turned out to be a challenge, but in the end, staying on good terms with me and our mutual friends was worth more to him than the money. Otherwise, I doubt I would ever have seen a dime of what I was owed.
What happens if I don’t get paid back?
A common refrain about lending is that you shouldn’t let someone borrow more than you’re willing to lose. I agree with that sentiment, but my concerns about loss aren’t just monetary. An unsettled debt can be a source of friction even in strong relationships, and I’d hate for my financial support to breed tension, resentment, or alienation from someone I care about.
A close friend of mine recently had to pay a large medical bill out of pocket, and didn’t have cash on hand to cover the full amount. He was a little embarrassed to approach his family for help, so he asked if I would lend him the remaining balance instead. Again, I knew he intended to pay me back, but I asked myself what would happen if he couldn’t? Would I feel OK about suspending or forgiving the debt for the sake of our friendship? I decided I would, and while repayment never became an issue, I was glad to have thought it through.
That experience helped me formulate another rule for myself by adapting the refrain above: Don’t let someone borrow so much that I risk losing them over it.
How will the money be used?
Money is a tool, and I want to use the money I have to create lasting good, so apart from how lending impacts my finances and my relationship with the borrower, I’m mindful of the broader consequences. I’m happy to offer someone a loan to get a new business off the ground or help in an emergency, but I’m reluctant to offer funds that will be spent frivolously or enable bad behavior.
A relative with notoriously poor money-management skills once asked for a loan to pay off some high-interest credit card debt. While I fully supported the idea, paying the debt off with my money seemed like treating the symptom rather than the disease, so to speak. Given his track record of overspending, I worried he would continue to rack up more debt and be back at square one. Lending him money didn’t seem like the best way to help.
Instead, I offered to advise him toward a more permanent solution. I helped him transfer his balance to a credit card with a 0% APR (to provide some breathing room), and I coached him on better money-management skills to keep him from repeating previous mistakes. The outcome wasn’t flawless, but it worked, and I felt much better about it than I would have by simply handing over cash.
What are my terms?
When I offer someone a loan, I generally don’t just hand it over. My money generally comes with a variety of expectations, and setting those clearly beforehand helps me avoid conflict and confusion later.
The most important part of a loan agreement for me is knowing how and when it will be paid back. If I loan someone cash, I probably don’t want to be paid back in gift cards, so I like to specify the method of payment even if it seems obvious. I also like to specify a timeline for repayment. I might accept installments, or I might prefer to get the whole amount back at once for simplicity; either way, I want to be clear from the start.
I’ve never charged interest on a loan, partly to be nice and partly to avoid the tax implications. However, I have accepted offers to repay a loan with a favor on top (like a homemade dinner or tickets to a sporting event).
I’m satisfied with informal, verbal agreements when I’m dealing with close friends and smaller amounts, but I like to put terms in writing otherwise. I’m more concerned with documenting the arrangement than drafting something that will hold up in court, so a printed and signed contract has always felt like overkill. A simple email acknowledgement works for me