Lending to a friend is both a delicate and complicated subject and it has the potential to make you lose a friend Ideally, you should learn to say ‘No’ and avoid getting into such a situation In case you can’t say ‘no’ to the friend, you should exercise caution
It is delicate because saying no to a friend during their financial need is tough. At the same time, it is complicated as the process of recovering the loan has the power to damage the relationship as such lending is largely informal and has no documentary record or governing terms and conditions. Ideally, you should learn to say ‘No’ and avoid getting into such a situation. In case you can’t say ‘no’ to the friend, you should exercise caution.
Lending money can change the equation between you and your friend. The warmth between you as friends will recede and will make your friend conscious about their obligation to you. Such deals are based on trust which makes it difficult for the lender to ask for their money back.
We take a look at 10 crucial points which you should keep in mind before lending money to a friend.
1. When your friend asked you for a loan, they may have committed to a repayment timeline. But what if for some reason they fail to repay your? They may not have assessed your financial status while taking the loan so they may not be in any hurry to return it.
2. If the money is lent without a legal agreement, the obligation to repay it in a timely manner would be lower.
3. You should also assess the situation where your friend is delaying repayment. There can be a possibility that they are going through a financial problem which is making repayment difficult. In such a scenario, more time should be given to the friend.
4. After understanding their financial situation, you should also sensitise your friend about your urgency. It would be better to visit your friend and tell them about your needs and why you want your money back.
5. When they ask for a loan, try and suggest other avenues through which your friend can borrow: taking a personal loan, loan against gold, loan against property, and an overdraft on a fixed deposit could be some of the options.
6. You can also expedite the process of repayment of loan by involving your friends and family in case you don't get your money back after a lot of persuasion.
7. Instead of lending on trust, or through a promissory note, try having a written document (written agreement on a stamp paper) in place. This should entail details about the amount, repayment date, return conditions etc. Also, involve your family members or spouses in this process as they will be able to reclaim your money in case of your absence.
8. It would also make sense for you to lend money to your friend through cheque or internet banking to keep a record of the lending.
9. If all kinds of persuasion fail to bear fruit, take the last resort of legal option. As this is last option to recover your money, ensure that you have all supporting evidences of default in place. You can show messages, bank details, or produce witnesses in support of your case.
10. Although going to a court to recover your money is the last option, it would also prove expensive for you as you will not only lose your friend, but you will need money to fund your legal process.
Finally, when all the options to recover money fails, do contemplate what you can do to avoid getting in such a complicated situation with your friends.
(The writer is CEO, BankBazaar.com)
