There is a great saying, “Lend money to an enemy and you will gain a friend. Lend money to a friend and you will lose him.” Yes, lending money to a friend can be one of the hardest and most complicated things in life. Lending money to friends is a very common practice in India. I am sure you would have lent money to a friend, at some point of time in your life. If I push harder and I’m sure you would hesitate to reveal, you must have also borrowed money from friends.
Why is it so difficult to lend money to a friend? Simple…You trust your friend to give back the money. You feel embarrassed to have a written agreement with him. You feel this will break your relationship. You are confident your friend will repay the money in time. If your friend doesn’t return the money, you will most probably not bring up the money topic. This is a wise move. It is widely believed that when you lend money to a friend and he doesn’t repay, you lose both FRIEND and MONEY.
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If your friend has a genuine need like a medical emergency, then you cannot refuse him money. Your friend might take time to return the money. Be patient with him. You must even be prepared to lose this money. Lend to a friend only if you can afford to lose this money.
Never lend money to a friend for lifestyle expenses. Your friend wants money to buy a smart phone? Don’t bother lending him the money. Your friend says I want to buy a car and am short of a lakh of rupees. You feel he is just tricking you out of money, don’t lend him. If this friend says goodbye….Consider yourself lucky. You have saved yourself a lot of trouble, as he would most probably not have returned the money.
You might be embarrassed to ask your friend to make a written agreement for money lent, but this is best for both of you. Go for a promissory note on a stamp paper. You must mention the loan amount, loan tenure, interest (in case you charge interest on the loan) and also any condition you need as a safeguard. It would be great if you could discuss this agreement in front of a spouse or a trusted relative. They could always collect the money, in case you are not around to do so. Read more here.
You might feel very bad refusing a friend, MONEY. But, if not lending money to a friend means saving your hard earned money and protecting your financial health, you must do so. Simple…lend money to a friend, only if you can afford to lose it.
Try your level best not to lend money to your friend. Advice him on different types of loans preferably secured loans (loans availed against collateral) like loan against a fixed deposit, loan against shares, loan against property or even a gold loan.
If you lend money to a friend to meet an emergency like a family emergency or a medical emergency, you cannot charge interest on the loan. But…sometimes a friend needs money to buy/repair his house. He might offer to pay interest on this loan. This interest you earn is added to your salary and you are taxed, depending on which income tax slab you fall under.
Money and Friends are like oil and water. The two should never be mixed. Try your level best not to lend to a friend. You could lose both, friend and money. Lend money to a friend only in an emergency. You must even be prepared to lose this money. Finally, lend money to a friend only if you can afford to lose this money. Be Wise, Get Rich.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.