Simple 4 ways to protect yourself when lending money to your friends (servicebloggers.com)

Never lend friends money is easier to say than to avoid. When you were put in a situation where someone you care about is asking for help, it’s hard to say no. But no matter how much your friend needs, there are ways you can protect yourself when lending to a friend or relative. If a friend asks for a loan from you, here’s what you can do to get your cash protected and returned back.

Asking for money is one thing, but being asked to take a loan in your name or co-sign for a loan is very different. If you’re co-signing, make sure you understand the risks and at the beginning you might think that you are helping. But never underestimate and put yourself in a position where someone could damage your credit score.

1. Create a written agreement and include worst-case scenarios or interest on loan

If you feel distrustful about lending, you could create a bond or loan agreement that outlines when your friend should repay you. You should also include what happens if they can’t repay. Think about the possibility of them losing their job or having unexpected expenses that make them unable to repay the loan. Write these into the agreement so you’re both clear on the procedure and each other liabilities.

Charge interest on the loan and set in place fees if your friend makes a late payment. It’s important to set a reasonable interest rate and terms. Having these in place will make the agreement formal and show you’re serious about having the loan repaid.

2. Ask for a security

Does your friend have a car, appliances or anything else that they’re willing to use as security? If this will put you at ease about the loan and your friend agrees, write the security into the agreement. However, remember they are still your friend, so it’s not a good idea to ask for their home as security. Taking your friend’s house is a great way to spoil a relationship.

3. Ask to be a silent partner or shareholder

If your friend needs money to start a small business you could ask to be a shareholder or a silent partner rather than just lending the cash. This way, you could make more money if the business is a success or write off the loan as a bad investment if it fails.

4. This decision should be made if it does not hurt you financially, “Pretend the loan is a gift”

Pretend the loan is a gift and only lend as much as you’re willing to lose. Your friend still may pay you back, but this may shift your attitude about the lending situation. You’ll be happy if the loan is repaid, but it should not pose too much of burden in your finances if it is not returned.

Final advice:

Just don’t forget to consult with a tax specialist or personal auditor. You may be hesitant in lending money to friends, but don’t hesitate to do above given steps as your friends didn’t hesitated to ask you, the same way you have right to safe guard yourself too.