Most people will, at some point in their lives, be called upon by a friend – or even a family member – for a loan. In these perilous economic times, this appears more likely than ever, especially with credit still tight in the wake of the financial crisis.
When a friend asks you for a loan – to help them get out of debt, cover rent, start a business or maybe just pay a bar tab – you need to think like a bank for a little bit. In many ways, you’re better off than the bank – people lie on their mortgage and credit card applications all the time, whereas you probably know your friend’s habits and situation pretty well.
There are genuine benefits to loaning someone money. People have long relied on an informal economy of favors to get through hard times, but many of these ties have frayed in modern America. Down the road, you might find that your favor is returned when you need it the most.
On the other hand, there are times when loaning a friend money is the worst thing you could do. Gambling debts or those run up under the influence of alcohol are inherently problematic. Another, equally dangerous kind of debt is that which allows someone to get in over their head in a business venture or other scheme that is ultimately doomed to failure.
It’s not always easy to tell when someone is prone to leaving their debts unpaid. Money is one of the touchiest subjects for most people, extremely likely to start heated arguments.
If someone has failed to pay a debt in the past, or has a habit of borrowing small amounts of money and then "forgetting" to pay up, they’re probably not a good risk. Similarly, someone who’s always between jobs and lacks steady income is probably a dicey prospect, unless they’ve proven otherwise.
The amount of money on the table also enters into the equation. Generosity in small things doesn’t necessarily need to transition into major commitments, but some people have a habit of steadily escalating their requests.
It’s tempting to say that any time a friend asks for a loan, you should refuse, but that’s not the case. Many young entrepreneurs got their start with a little bit of social "seed capital" from friends and family – if you think someone has a really brilliant idea, your backing could help them get off the ground.
And if you’re the sort who’s always borrowing from friends and family – think long and hard about your habits, and make sure you are not putting an undue burden on them.