Loans from Friends: How to Ask to Borrow Money

Last Updated Oct 7, 2010 3:52 PM EDT

Amy Alves, 27, and her close friend Wes Knapp, 31, have been hitting each other up for small, short-term loans ever since they were college roomies. In all, they've borrowed from and loaned to one another about 10 times, ranging from $20 to a few hundred dollars. "We've been friends for so long - and we have always honored [our loans] to each other - [that] we have that level of trust," says Amy.

The two usually ask one another for help paying last-minute bills. "We never had any ground rules," says Amy. "It was just straightforward: 'Hey, this is my situation, can I borrow this amount? This is when I get paid, so I'll give you the money then.'"

While Amy and Wes like to keep their money relationship casual, that's not always the safest way to approach borrowing from a friend. If you need to ask a friend for this (pretty serious) favor, remember that - no matter how confident you are - your friend is probably skeptical that you can repay the amount.

With good reason: According to Jeanne Fleming and Leonard Schwarz, authors of Isn't It Their Turn To Pick Up The Check, 95% of adult Americans have lent money to friends or family members - but for the largest loans, 43% said they were not repaid in full.

With that in mind, here are some thoughtful ways to approach friends for a loan.

Ask for Advice First, Services Second, Money Third
Money is not the only assist your friends can provide. Friends can offer a wealth of advice and resources to help you find a way to save money on your own - a safer route to take. Maybe your friend knows some dramatic way you can reduce your living expenses to shore up cash, or a quick side gig that could bring in that money. Or maybe he or she can help you save: A babysitting offer, for example, could cut your costs by $100 or more. And if you need a new suit for a job interview, try shopping in your friend's closet instead of at the mall.

Put Your Friend at Ease
If you do decide to ask for the moolah, "make it easy for [your friend] to say no," say my friend Kimberly Palmer, author of the new book Generation Earn: The Young Professional's Guide to Spending, Saving and Giving Back. "Pressuring someone into lending you money will only ruin the friendship - and [will] not help you financially - so you should open any conversation by emphasizing that they should feel comfortable turning you down and only help you out if they really want to," she suggests.

Be Specific and Truthful
Don't just ask for $200 without mentioning what it will specifically be used for. Your friend deserves to know how his or her money will get used, so define your need. Is it that you're low on rent this month or you want to pay for concert tickets? Be honest.

Put It in Writing
This is to protect both of your interests. Amy and Wes have always kept verbal agreements, but they may be lucky that things have always worked out. An agreement can be as simple as a piece of paper stating how much you're borrowing, for what reasons, and how and when you will pay your friend back. Include both your names, the date and signatures.

If you want to make the contract feel more professional, a site like LoanBack will help you craft a loan document between you and your friend. It costs $15 to $30, depending on how sophisticated you want to make the agreement. Contracts created on this site are legally binding. There's also Virgin Money, which can draft the agreement and administer the repayment process. It's more pricey, around $100 - but it may give your friend confidence to know the site will actually go after you for the money if you flake.

Return the Favor ... and Then Some
Amy and Wes usually pay each other back with a small bonus as a show of appreciation. "It's not that we set an amount for interest," says Amy. "It was more like, 'Thanks so much for doing me this huge favor; I'll throw in 10 extra bucks when I pay you back.'"

Call it what you like, but a little extra something to show your appreciation is the friendly thing to do.


More on MoneyWatch: Photo courtesy: AMagill's Photostream on Flickr
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    Farnoosh Torabi is a personal finance journalist and commentator. She is the author of the new book Psych Yourself Rich, Get the Mindset and Discipline You Need to Build Your Financial Life. Follow her at www.farnoosh.tv and on Twitter at @farnoosh.

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