Should you loan money to friends?

Elliot (No)

Loaning money to friends risks straining relationships, raising emotions, and even producing financial stress on the lender who needs repayment. The age-old adage of 'don't mix business with friends' is worth noting. What happens when the loan becomes a source of stress? What happens when friends feel pressured to lend more than they can afford? What happens when the relationship changes over time, and an argument makes repayment unlikely? These issues lead to a severe emotional toll, affecting the peace of mind of both friends. 

Friends are also less likely to pay each other back because there are almost zero negative consequences for simply walking away. Unlike a bank or a credit card, the friend has no legal recourse unless a contract is in effect. Legal complications may arise with verbal agreements never put in writing—common among loans between friends. Once one has loaned to a friend, an expectation for or dependence on future loans could develop, overwhelming friends who lend.  

Another possibility is that two people's financial values might not align. For example, one friend might not see debt as a big deal—going years without paying it off. Or worse, they might put the money toward things that shouldn't be prioritized, such as lifestyle enhancers over bills, etc. Unknown, unforeseen circumstances could also keep a friend from repaying the loan, such as job loss, medical bills, or other emergencies, which could lead to your own financial instability. Disrupting your own financial goals when there are so many options for friends who need to borrow money isn't worth it. Peer-to-peer lending represents an easy alternative to traditional credit, so there is no need for these informal friend-to-friend loans in the modern era. 

James (Yes)

Loaning money to friends can significantly impact one's relationship for the better. It's not just about the financial transaction; it's about building trust. By offering a loan, a friend demonstrates their belief in the other friend's responsibility and commitment to repay the loan. Trust is the cornerstone of true friendships, and extending this level of trust can fortify the bond they share. In times of financial crisis, a friend's support can be a lifeline; just as the saying goes, 'A friend in need is a friend indeed.' Loaning money to a friend provides immediate assistance during challenging moments, helps them navigate tough situations, and offers relief and stability when they need it most. This act of financial aid can strengthen a friendship, as the friend in need will remember the support they received during their time of need. And if the situation were reversed, you'd want a friend to help you through the same way.

Beyond the moral merit of it, another significant advantage of loaning money to friends is the opportunity to help them avoid high interest rates. Traditional lenders often charge substantial interest, but you can negotiate better terms and lower rates with friends. This not only eases the burden on your friend but also saves them money in the long run. Moreover, sharing the details of the financial need can open the door to valuable advice and guidance beyond the financial aspect. Your friend can benefit from your insights, making the friendship more meaningful and supportive. Finally, helping a friend in financial need can be a rewarding experience. It fosters personal growth and a sense of altruism, reminding you of the value of supporting those you care about and profoundly enriching your life and that of the life of your friends.