Should You Be Lending Money To A friend?

By BankBazaar | October 27, 2016

Should You Be Lending Money To A friend?

If you were in a situation where a friend asked you for a loan, what would you do? Would you give it wholeheartedly? Would you politely decline? We all know that money has the power to turn relationships sour, which is why we all dread that moment when a friend asks for loan.

Although, we believe in helping out a friend in need, we suggest you analyse the situation first in order to handle it smartly.

Here are our tips on navigating some tricky questions without hampering your relationship.

Analyse the situation
When a friend approaches you for help, make sure you understand his reasons well without prying into his business too much. On judging the gravity of the matter, think about how a ‘no’ would impact your relationship. If you refuse to help your friend out once, he might never approach you again for monetary help. On the other hand, try and understand how lending to a friend will impact your own budget and finances.

You aren’t keen on lending
Here’s how you can handle the situation if you decide that you would rather not loan your friend money. If your friend has not already approached any bank or financial institution, you could suggest that he or she raise the money through a loan. There are several types of loans available such as Personal Loans, loan against property, loan against gold, overdraft on FD or borrowing from private financiers.

Bonus Read: Pre-approved Personal Loans – The Basics

You decide to play the Good Samaritan
You decide to loan your friend the money he or she needs. Before you hand over any money to your friend, though, think about the impact it could have on your financial planning. Make sure you lend only out of the excess money you have after paying all your EMIs, debts, insurance premiums, monthly and sundry expenses, and have put aside some money for your investments. Do not disturb your regular repayment schedules in order to help out your friend. Also discuss the terms and conditions with your friend before lending any money. This includes discussing the tenure, repayment schedule and interest rate if applicable. Agree on a specific period within which the loan needs to be repaid. You could also suggest being paid back in the form of monthly installments.

Bonus Read: EMI Payments Explained

Assess your position
Before you go all out to help your friend, assess your financial position. We suggest that you don’t over-estimate and jeopardise your financial health to meet your friend’s requirement. Hand out only the surplus amount you have after calculating your expenses and request your friend to explore other options to meet the rest of the requirement. We know there is a possibility that things might go south with your relationship but it might make more sense to protect your own finances first.

Keep it documented
Make sure you have a written agreement or promissory note on stamp paper in place, in case you’re lending a big amount. Mention all the terms and conditions in order to document the transaction and safeguard your interests. Consider discussing the matter with your spouse or other family members so that they can follow up with your friend in your absence. Transparency in such transactions will help avoid any confusion about the loan.

Tax impact and legal protection

If you are receiving interest from the loan, the amount will be subject to Income Tax according to your tax slab. To ensure that everything is traceable and documented, make sure the money is lent through an account payee cheque. You can ask your friend for post-dated account payee cheques for the repayment of the borrowed amount. If a cheque bounces, you can immediately take legal action. And remember, in case of a dispute, you will be able to get legal support only if there is a written agreement in place.


We hope you now have a better idea about what to do when lending to a friend.

If you’ve ever been in a situation where you lent money to a friend, tell us what happened and how you handled things. And if you’re looking for a loan yourself, you know where to go.

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