A friend of mine recently asked about lending money to a friend. I have always said that if you can afford to lend money to a friend, then give the money as a gift. If the gift is repaid, that’s an unexpected bonus.

But, you should never lend money to friend, especially money that you need to pay your own expenses. I say this because when people lend money to a friend, they often never get the money back, That’s not because your friend isn’t trustworthy, or sincere. It’s a matter of need. Think about it: If your friend can’t afford to pay a bank loan or rent, then how will he be able to pay you? Especially before you need the money yourself? Unfortunately, lending to a friend often means the friendship is lost along with the money.

It’s difficult to watch a friend drowning in debt or suffering without a car or apartment, but two drowning people are not better than one. There may be better ways to help out than putting yourself at risk.

Back to my friend.  Unfortunately, she had already lent a substantial amount of money. She had also done everything possible to set up the loan legally with a contract, lien against the borrower’s home, and a formal payment plan. It sounded OK, so, I asked what the problem was. She said that her friend had filed for bankruptcy. That’s a problem.

My friend did everything right and took all the steps to protect herself, and now she will be out a large amount of money that she needs to cover her own expenses. She could never have afforded to give this amount as a gift, but that’s what it became. Will she get her money back? Probably not. In this economy, her friend’s home may not sell and when it does, it probably won’t sell for enough money to cover the loan.

My friend learned a very hard lesson in life. Their friendship will probably never be the same because of the damage that was done. Before you lend money to someone, think about all the possible outcomes and then make your choice.