Ways to handle a friend who wants to borrow money from you

"No" is a difficult word to say, especially to a close friend who is asking for money.

Take for instance the case of Supriya Thomas (name changed), a 20 something who works for a Mumbai-based private company. She had lent Rs 40,000 to her room mate. "I had known her for over three years, and we were close friends. She needed Rs 40,000 to get admission in a foreign university. I just could not say no. It was for education after all."After four years, Thomas has not got back a single rupee, and the friend has relocated to London. They are no longer in touch.

Friends borrowing money is common andeverybody would have come across such instances, if not as a prey, as a predator.Firstpost did a quick dip-stick survey to find about how people thought of lending money to a close friend. We found that majority of the respondents were sometime or the other asked by friend to lend money, that too fairly big amounts. In one case, the amount was Rs 8 lakh.

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Should one even consider lending money to a friend at all?

But, what are the things one should consider before lending to a needy friend? Is there a right way to handle the situation? Should one even consider lending money to a friend at all?

If you go by what psychologists George Loewenstein of Carnegie Mellon University and Linda Dezso of the University of Vienna found in their research, lending money to a friend is not a very good idea. This is because we tend to remember the loans we give, but forget the loans we take. And this phenomenon, where borrowers conveniently forget that they owe money to a friend,is called 'blind spot'.

But, irrespective of the blind spot phenomenon, when a close friend asks for money, more often than not we are obliged to give, that too without interest after all, we don't want to spoil our relationship with the friend. But when is it okay to give?

Most respondents we spoke to said they would give money for a medical emergency. While the amount each respondent would give varied, the average amount most were ready to lend for medical emergency was Rs 1 lakh.

"If it's a genuine need like a medical emergency, you should give, but only an amount you could write off immediately," saidRanjit Dani, Certified Financial Planner."When you write off the amount mentally, even if the money never comes or comes after a while, you don't lose a friend.In most cases when you lend money, there is a good possibility that you land up not only losing the money but also a friend," he says.

Suresh Sadagopan, another Mumbai-based Certified Financial Planner agrees. "Lend only what you are willing to write off, spare cash which you won't be bothered if it wasn't returned," he says.

But what if a friend asks money for a lifestyle expense? "Never lend," saysSadaagopan. "There are people who come saying they are only a lakh short for a new car. If they can't afford to buy with their own funds, they should not buy it all. In such a case, simply tell them a sob story of your finances. That would work."

Now, if it is to make the down payment for a home loan? Use your discretion. It would really depend on your comfort level and the relationship you have with the friend. "To lend or not in such a case is entirely your call. But, you absolutely should not agree to guarantee the home loan, under any circumstance," Sadagopan says. (To know more on guaranteeing loans, read Firstpost articles here.)

If you are lending to start a business or as a seed capital, most respondents said they would not be comfortable charging an interest. Experts we spoke to, however, are of the opinion that when it comes to business loans, it is the best to charge an interest also draft a written agreement. Set payment schedules and take post-dated cheques.

"If possible try to get equity in the business itself, but only if the person knows what he's doing and has a solid business plan in place,"Dani advises.

Whatever the reason behind lending, you should take care that put will not be in a financial tight spot.

"If a friend asks you for a loan habitually and you realise he's doing the same with some other friends as well, you should be cautious," saysRajan Bhonsle, MD, Founder Director of Heart To Heart Counselling Centre.

"There are pathological borrowers out there who get kicks out of borrowing money. It's like an obsession. And this person might need some professional counselling as well," he says.

And then there are friends who borrow from multiple people at the same time to fund their need. They borrow from and pay off the another's debt. "As a rule, never make a fresh loan, unless you've recovered what you lent in the first place," saysSadagopan.

We are not saying that all friends are out there to cheat you. But if you go by what psychologists say, people do tent to forget when they borrow. So, think many times over before you lend. Do not fall for emotions.

Here are five questions for you. Do reply to these in the comment section.

1) Has a friend ever asked you to lend him/her money?

2) What was the maximum amount asked?

3) Assuming a close friend is in need, what's the maximum amount you wouldbe willing to lend in the following circumstances?

a) in case of an emergency

b) in case your friend is looking to make down payment on his house

c) for a lifestyle need/ going aboard

d) to start a business

4) What's your view on charging interest on that loan?

5) How soon would you expect to be paid back (in months)?

Published Date: Nov 07, 2013 11:15 am | Updated Date: Dec 21, 2014 03:51 am

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