For better or worse, the COVID-19 pandemic has likely affected your finances. In a recent survey by the Associated Press–NORC Center for Public Affairs Research, 52% of Americans said they’ve been able to save more money than usual, pay down debt faster, or both. But many Americans haven’t been so lucky. Nearly half of survey respondents reported damage to their household income in the form of a layoff, reduced salary or a cut in hours. As long as the economy remains partially closed, millions of Americans will continue to face hard times.
If you’re among those who are financially fortunate, you might find yourself fielding requests for a little help from your friends. What’s a few dollars between friends, you ask? Potentially, quite a lot. In a recent Bankrate survey, 37% of respondents who had lent cash to a friend or family member said they had lost money, and 21% said their relationship with the borrower had been harmed. The potential for damage to your friendship or your finances is enough for many financial planners to advise against making personal loans altogether. “Don’t take your friendship as collateral,” says David Mendels, a certified financial planner based in New York City. “If you’re not willing to walk away from the loan and still be friends, don’t make the loan.”
If you have the means to help out but don’t want to risk things getting awkward over repayment, consider the money to be a gift, says Dallas-based CFP Lora Hoff. “If you get your ‘gift’ back, hooray! If you don’t, you can’t really be upset,” she says.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you’re uncomfortable or unable to make a loan, be clear and honest with your friend about your decision, says Daniel Post Senning, of the Emily Post Institute. “It’s okay to have a blanket answer, and it can be as simple as ‘I don’t lend money to friends,’ ” he says. You can avoid hurt feelings by expressing sympathy for your friend’s situation. “Someone is taking a risk when they make this kind of request, and taking care with their feelings is important,” Senning says.
Helping out while protecting yourself. If you’re thinking about lending cash to a friend, first consider whether you’re in a position to do so. Make sure your emergency fund is fully funded, and be realistic about expenses that could arise over the course of the loan, says Peter Palion, a CFP in East Norwich, N.Y. “You could get laid off. You could run into health issues. Make sure you have money above and beyond your own needs before loaning it out,” he says.
Before going through with any loan, have a discussion with the recipient about your expectations for repayment, and put those expectations—including the loan amount, a repayment schedule and any interest—in writing. By drafting a promissory note for both of you to sign, you indicate to your friend that this is a business transaction while protecting yourself in the event that the loan goes unpaid and you decide to seek legal redress, says Peter Creedon, a CFP based in Mt. Sinai, N.Y. If a friend balks at making the loan official, it’s a sign that he or she isn’t serious about paying you back.
You shouldn’t hound a friend who neglects to pay you back, but a reminder falls within the rules of good etiquette, says Senning. If the loan goes unpaid, you’ll have to decide whether it’s worth the trouble to litigate, a process that can be expensive and time-consuming. You will also have to determine whether the amount of money you lent is worth the potential damage to your friendship—a painful calculation that’s reason enough for many people to avoid this situation altogether.
-
Dow Adds 646 Points, Hits New Highs: Stock Market TodayIt was "boom" for the Dow but "bust" for the Nasdaq following a December Fed meeting that was less hawkish than expected.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
What Does Medicare Not Cover? Eight Things You Should KnowMedicare Part A and Part B leave gaps in your healthcare coverage. But Medicare Advantage has problems, too.
-
15 Reasons You'll Regret an RV in RetirementMaking Your Money Last Here's why you might regret an RV in retirement. RV-savvy retirees talk about the downsides of spending retirement in a motorhome, travel trailer, fifth wheel, or other recreational vehicle.
-
When Renting Is Smarter Than Buyingreal estate There are some situations when renting is smarter than buying. You're not necessarily throwing your money away when you rent.
-
How Do You Pay off Credit Card Debt?Making Your Money Last Pay off credit card debt with these tried-and-true strategies.
-
Bear Market Strategy for Millennial InvestorsA focused, goal-oriented approach to investing can help millennials navigate a bear market.
-
Rent vs. Buy: Sometimes Renting is BetterPersonal finance experts have long held that homeownership is a key step to building lasting wealth. How does that hold up in a pricey real estate market?
-
Protect Your Retirement Income from InflationMaking Your Money Last With a new President promising tariffs on imported goods from China, Mexico and Canada, inflation may rise in 2025, but that doesn’t have to jeopardize your long-term security.
-
What to Know About CD Ladders, A Flexible Way to SaveSavings One way to keep your earnings on track is to spread out your cash.
