If you have a handsome amount of money built up inside your portfolio, or even just your savings account, then you may find yourself approached with one of the hardest questions to answer financially. When a good friend asks, "is there any way at all you can loan me some money?" If that were the exact phrase of the question, then I strongly advise answering no -- but if the actual question were tied to a specific sum of money (and in cases of sincerity, it usually is), then the request becomes more difficult to decline.
Unfortunately, there is no easy answer in this case, but I can share some of my own experiences and leave the actual response to your own preference since the best answer is neither "yes" nor "no" but rather whatever response enables you both to maintain the friendship comfortably thereafter.
It is no secret that financial strife is often listed as the number one cause of divorces, and I would imagine it is just as damanging to friendships as well. Therefore, my automatic answer is no for the most part. There have been exceptions, however, and there are a few steps to making the request a positive experience. The first is deciding on your own personal maximum, whether it is $1,000 or $100. Ideally, this number should be a direct reflection of your own financial security, but to assume you are financially independent, then this number would be determined by your own feelings of being used or abused (or, more frankly, when you feel as though you are being taken advantage of).
First off, you should donate to charity if you are financially comfortable. Aside from the good it does both for society and for yourself, it is also a good way to protect yourself against scams and other abuse, because it gives you a buffer of (what I call) "forgiveness protection." Whenever I am cheated out of money, I have the ability to reduce my donations by that amount so it does not affect my life at all. Unfortunately, there are people who will understand that mentality and other people who will misunderstand it. If it makes perfect sense to you, then hopefully you are already in practice of it to some degree. If it sounds like flawed logic, then you are probably in the latter half so please don't apply it to your life.
When you loan money to friends, take it from this amount of charitable donations. When your friend pays you back, then the amount goes to charity. Keep in mind that this buffer will not ease your feelings of potential mistreatment, so never give beyond that original amount with which you are comfortable. Ever!
I have given to friends who paid me back and I give the money directly to charity because, for all intents and purposes, my giving it to them was my charitable donation. The first time I loaned a friend a substantial sum of money and she paid me back, I just gave it directly to another charity. It immediately made me feel as though I got twice as much mileage from that charity by loaning it to a friend first (mind you, this logic only prevails if all goes well, so do not bank on that as justification for loaning money to friends).
In another instance, I once loaned a friend money and then I lost my job several months later (about 15 months later). She started paying me back when I was between jobs, so the money came back to me when I needed it most. The money I was getting back then was not money that I would have held in a saving account without loaning it to her. It was money that I would have given away to charity already. Therefore, when I got a new job, I increased my charitable donations to cover that amount as well. In that case, I was my own charity, and the money got thrice as much mileage. But that was an exception, not an expectation.
When you loan money by this philosophy, then this next point should be a no-brainer: never charge interest for a loan! If you need any further evidence of that advice, then refer to Deuteronomy 3:19-20. Sure, banks do it all the time, but that's their business model. Investors do it all the time as their incentive. You are not in the business of profiting off friends. You are in a friendship with a person who is less financially stable than you are. If you give $1,000 and ask for $125/mo. for 10 months, then you have taken $250 more from your friend than they could really afford (extenuating circumstances aside). Potentially, your friend may offer to pay interest on top of the original amount (i.e. paying $100+ for 10 months for borrowing $1,000), but do not use that profit as incentive for giving the loan. Consider it your friend's gratitude for helping out in a time of need. The big difference here is that you are not entitled to the additional interest, so if your friend skimps on that amount, then consider yourself lucky to get the full principle returned.
Finally, the most important aspect of loaning money to friends is to never, ever ask for them to pay you back. Do not loan money you cannot afford to lose, and when you loan out money, do not assume control of when you will get it back. Truthfully, this aspect could be a real deal-breaker in most cases, and it is the reason for my first advice of the standard answer of "no" to most requests. There are ways to create payment plans and other such arrangements in order to stay on track, but they violate the "forgiveness protection" buffer, so you can never be sure. I have loaned money to a friend where we set up a payment plan, and invariably, there was often a reason why the payments had to be delayed. In the interest of full disclosure, it was actually he who insisted on the payment plan. And to my friend's credit, I got all the money back (but I told him to pay me whatever he could when he could, and it took about twice as long as he had originally designed).
Regardless, we are still friends today. And, perhaps surprisingly, he has not asked to borrow money since the loan was repaid. And that is the surest sign that I made the decision in that situation.
There are times when loaning money to a close friend is the best thing to do. But don't cloud your judgment with the best case scenario or swerve your expectations when you weigh the decision. Your friend's sincerity will not increase the likelihood of full repayment. It could just as easily end the friendship.
