Borrowing Trouble
When You Lend Money to a Friend,

You Risk Losing More Than Cash

“Neither a borrower nor a lender be; for loan oft loses both itself and friend,” Shakespeare cautioned in “Hamlet.” It’s good advice in theory, but what if you have a close friend who’s in dire financial straits and your heart goes out to her? Should you toss the theory to the wind and make an offer to help anyway? For a variety of complicated reasons, women, more often than men, tend to do just that.

Martha* thought she had good reason to break Shakespeare’s rule. She and Gladys had been friends for more than 15 years. Their kids grew up together, and they went to the same church. When Gladys tried to start her own floral business last summer, she asked Martha, a 51-year-old single parent who works in hospital public relations, to co-sign a bank loan. Martha refused, telling her, “I don’t do that for anybody.”

A week later, Gladys asked Martha to lend her $1,000. Martha agreed, on the condition that Gladys pay her back by September, because she needed the money to cover her children’s schooling. “This is a sacrifice for me,” she told Gladys. “But I’ll do it for you.”

September came and went; so did October. Still Martha did not see her money. She had to borrow money from her sister to pay for her kids’ school expenses. Suddenly she stopped running into Gladys. Martha left messages on her answering machine. Gladys did not return them. Finally, in November, she stopped asking Gladys for her money back and instead left a message, saying, “I’m not calling about the money. I’m worried about you. Are you all right?” Still, there was no answer.

Martha felt so responsible for the situation that had developed that she didn’t tell a soul for months. Finally, she could no longer bear carrying the burden alone, and she told her best friend and her teenage children what had happened to her money—and her longtime friendship with Martha. They didn’t blame her at all. Seeing her tears, they encouraged her to forget about the money and move on. Martha wanted to, but she just couldn’t let go. Her last hope was that Gladys would repay her by Christmas. She did not. In mid-January, Martha decided she needed to be more assertive. She finally tracked Gladys down, had a brief, tense phone call with her, and sent her an e-mail, demanding her money.

“I am a good person, but don’t mess with me,” she says now, thinking back on the long ordeal. She is prepared to take Gladys to small-claims court, if she doesn’t begin paying her back by spring. The whole experience has been incredibly stressful. But she acknowledges that something positive has come from it. “I’ve started to look at how I take on other people’s stuff,” she says. “I try to do so much for people that I have compassion fatigue: I care so much for others that I neglect myself. I didn’t trust myself before. I know now that everything you know is right inside of you. You just have to listen.”

Martha’s story raises issues for all of us. Can you lend money to a friend and keep the friendship intact? If so, what do you need to do to make it work? And how do the dynamics between friends shift when money passes hands? Or is it better not to lend money at all, but to find other ways to help a friend in financial need?

If you do want to make a loan to a friend, then ask her to sign a contract, agreeing to an interest rate and a payment schedule. (The IRS dictates a minimum rate that you must charge for personal loans under certain circumstances; consult www.irs.gov or IRS Publication 550.) But before you do anything, ask her about her financial history: Has she been in debt before? Does she pay back loans in a timely fashion? Is she, perhaps, feeling alone, because of a death in the family? (In this case, there’s a chance that she might not repay the loan as a way to stay connected to someone—you!)

This is a difficult conversation to initiate, especially for women. Joan Sotkin, prosperity coach and founder of www.prosperityplace.com, cautions, “If you feel guilty or embarrassed, then you’re looking at the feelings, not the money. And the fact is, it’s always an emotional decision with a friend. For most people, it’s hard to be detached. If you care whether you get the money back, it will change the nature of the friendship—and not necessarily for the better.”

If, through your conversation, you discover that there is a pattern of debting, says Sotkin, “then by lending money, you’re enabling her to continue the pattern.” The flip side of this, she notes, is that you may be enabling yourself by lending money. “Very few who have been asked for money haven’t been asked before. They tend to be the rescuers, the caretakers,” observes Sotkin. “When you lend money to a friend, you should assume you’re not going to get it back. Debtors usually disappoint lenders. And if you have a history of being disappointed and betrayed in relationships, then absolutely don’t lend money. You’re just enabling yourself” to perpetuate a destructive pattern.

Judith Briles, author of “Ten Smart Money Moves for Women,” agrees: “You don’t give money to family or friends unless you’re willing to kiss it off.” Both Briles and Sotkin advise attaching strings to any loan. “If someone approaches you to borrow money, you are, in essence, acting as a banker,” says Briles. “So you can ask, ‘What’s the purpose for the money? To go to Europe? No, not with my money.’ They need to be clear about what’s it’s for—why they’re borrowing it—and they should pay interest.” Get them to sign a promissory note, so that, if they don’t pay it back, you can try to take a non-business bad-debt deduction on your taxes. Take into consideration, too, that if the loan, plus interest, is repaid, you’ll have to declare the interest as income on your taxes.

If your friend does not pay you back as planned, she should acknowledge that. She can simply say, “I’m not recovering financially as quickly as I’d expected. I’m not going to be able to pay you back when we planned.” This is what Martha Lee wanted from her friend Gladys: an acknowledgment and a progress report.

When it becomes clear that you’re not going to get your money back, then it’s time to have another conversation. Tell your friend: “This loan doesn’t look like it’s going to get paid back. But I want to maintain my relationship with you, so I am going to go ahead and claim it as an expense on my taxes.” If she hasn’t already signed a promissory note, ask her to do so now, and check with an accountant about how to file for the deduction. You’ll need proof, for instance, that you attempted to collect on the debt. The IRS may come after your friend, in the end, to reimburse them.

Of course, from a purely financial standpoint, you can write off the loan. But, as Martha discovered, it’s not so easy to write off your own feelings of anger and disappointment, when a friend lets you down.

There are many ways you can be a true friend to someone in financial trouble, without writing a check. Offer to sit down over a cappuccino and discuss her situation. Be a sounding board. Give advice, when asked. Encourage her to take action sooner rather than later. Help her to see that it’s better to take cautionary steps now than to wait until she loses her job or has to declare bankruptcy.

Many people miss a credit-card payment once in a while or get strapped around the holidays and can’t pay the rent, but if your friend has continuous troubles with money, this is an indication of more serious problems that need to be resolved, and she would benefit from consulting an unbiased third party who can help her get a handle on what her options are. “It’s not a good idea for you to become her budgeting counselor,” says Briles.

You might suggest that she consider consulting a finance professional or a credit-counseling service, such as Consumer Credit Counseling Services (www.cccs.org, or call 800-873-2227). If she has serious, ongoing financial troubles, refer her to Debtors Anonymous (www.debtorsanonymous.org) or Codependents Anonymous (www.codependents.org). And if she has exhausted all other options, assure her that there’s nothing wrong with bankruptcy.

But the best thing you can do for any friend in financial difficulty is simply to be there. Let her know that she’s not alone. Call often to see how she’s doing. Invite her over for dinner. Suggest that the two of you go for a walk together. If she’s out of work, give her a lead for a job, help her update her resume, offer her networking suggestions. None of these cost you a thing, yet they are priceless gestures.

When money enters a friendship—even if there’s no loan—the dynamics of the relationship shift, as Maggie learned. Jenn, 41, has never been able to save money. She lives from paycheck to paycheck, has never had a savings account, and so has no reserve to cover her, in case she gets sick or her car needs repair. Her close friend, Maggie, and Maggie’s husband, Nick, were concerned about her and offered to help. They suggested that Jenn give them $25 a month to hold for her, as enforced saving. She agreed that this was a good idea, and it worked for nine months. Then Jenn asked for the money back. They couldn’t say no. After all, it was hers. Jenn spent the money on a stereo system.

Maggie was furious: how could Jenn be so stupid, when they were trying to help? Jenn, no doubt, feels that Maggie looks down on her now, because she can’t do something as simple as put a few bucks away each month. Maggie just wanted to be a good friend, but now there’s a tension between them that never existed before. They are no longer equals. Jenn probably feels demeaned. Maggie can’t let go of her anger.

Eventually, Bonnie made a decision. “We had a long history and had shared so much,” she recalls. “Right now, she doesn’t have money, and I do. I’m not going to let it come between us.” Bonnie worked hard within herself to forget about the money and to accept Joan for who she was. She was able to let go. Twenty years later, they are still friends. Bonnie still remembers those times when Joan was strapped financially, but she doesn’t carry any resentment about them.

If, after considering all the risks of lending a friend money, you still want to help her financially, the best thing to do is to give your friend a one-time gift of the money. No strings attached. That way, she does not have to pay you back; she can spend it as she pleases, and it will not hurt your relationship. She will feel deeply supported, and you will feel that you have helped her in her time of need.

Perhaps someday Martha will see things that way.

* All names, except the experts', have been changed to protect their privacy.