What to Do When a Friend Owes You Money

asian man on phone upset — It's so annoying to have to repeatedly ask people for money they owe you. Carlina Teteris/Getty Images

It's a conundrum many know all too well, sometimes with painful results. A friend or family member needs to borrow a significant sum of money. Of course you want to help, but the stories about relationships ruined by failed repayment of loans are troubling. What's a would-be Good Samaritan to do?

Indeed, it's likely that you'll face this problem at some point if you have a bit of cash cushion lying around. A survey by Bankrate found that 60 percent of U.S. adults have lent moolah at some point to a loved one. Of those, 37 percent said they lost money and 21 percent reported the experience hurt the relationship.

This is an experience that Ezra Cabrera knows all too well. A few years back, a childhood friend borrowed $6,000 from the content marketing manager to pay necessary bills, like rent and utilities. "She lost her job at a time when she was diagnosed with depression. It was a tough time, and I felt nothing but sympathy for her," Cabrera recalls by email. "After a few days after she got the money, I received a call from her mom, asking if my friend was staying with me because the landlord said that her apartment was empty. Apparently, my friend ran away with my check and left her debts at home."

Understandably, this experience had a lasting effect on Cabrera. "Now, every time someone [asks to] borrow money from me, I always go back to this experience and immediately say 'no' even if my heart tells me that this person needs immediate financial help," Cabrera says. Not that she never helps anyone out -- a consultation with dad helped her to sort this out. "He told me that if I feel deep in my heart that this person is sincere and needs the money ASAP, I should just give whatever I can. Give money and not lend it to them."

Why People Fail to Pay Back Loans

Cabrera doesn't know exactly why her friend stiffed her, but experts say there are plenty of reasons that this happens, not all of them as sinister as you might think.

They're terrified. Debt at any level is upsetting. Overwhelming debt can make people behave in unnatural ways. "When individuals are afraid, they may either take immediate action and solve an issue, or they can stay silent and flee," says Charles McMillan, businessman and founder of Stand With Main Street in an email. "And when you're in a lot of debt, there's a lot more dread involved with it. So, rather than confronting their fears, they stuff them in a closet, make minimal loan payments, and hope it goes away in 15 years."
They don't want to change their ways. McMillan also notes that some people aren't willing to do what it takes to pay off debt, even if it negatively affects a friend or family member. "The more sacrifices you make, the quicker you'll be able to pay off your debt," he says. "Sacrifice is difficult in a society of immediate satisfaction and people telling you that you should have whatever you desire."
They're confused. After a little bit of time passes, the details of the loan can blur. Or, maybe details were never discussed in the first place! Catherine Alford, financial educator and author of "Mom's Got Money: A Millennial Mom's Guide to Managing Money Like a Boss," says that the root of relational problems with money is almost always due to lack of clear communication. "Parents or friends loan money out without setting clear guidelines and expectations on when they expect to be paid back. Without clear boundaries, those who borrow it feel like they have flexibility or unlimited time to pay it back," she says. "They might have the cash to pay it back now, but without the pressure of a deadline from their 'lender,' they feel as though they can use their cash for other things." Like a trip to the Bahamas.

Certainly, there are plenty of other reasons, ranging from laziness to just plain jerky behavior, but many fall in these middle categories.

How to Prevent or Handle Loan Repayment Problems

Whether you've been burned before or not, there are some ways to ensure you either get your money back or ease the resentment that might come if you don't.

Make it a gift. As Cabrera's father recommended, reframing a loan as a gift is certainly something that many experts recommend. That way, "If it gets paid back, that is a bonus, says financial attorney Lyle Solomon in an email. "Never loan money you can't afford to lose."
Put the terms on paper. Get the details down on paper before handing over any cash. This will minimize confusion on both sides. "The act of loaning money to friends and family should absolutely include a formal written loan agreement that memorializes the terms," emails David Reischer, Esq., attorney and CEO of LegalAdvice.com. "There is no need to hire an attorney for such an agreement but having something in writing is important to avoid a future dispute when memories have faded." Be specific, too. Note whether or not you expect to be paid back, and if so, when? Also, stipulate whether or not you'll charge interest. Having something in writing will be especially handy if the loan is big enough that you feel you need to take the person to court to get your money back.
Don't be afraid to issue a gentle reminder. "Perhaps that person has too much going on that he or she simply forgot," emails Michelle Davies, professional life coach and editor-in-chief of The Best Ever Guide to Life. "Keep it lighthearted and even try to inject a little humor to ease the mood. Nonetheless, make sure to be clear on why and when you expect the money back."
Make a payment plan. Paying back $1,000 all at once probably seems impossible to the borrower. But $50 per month is doable. Offer a regular payment plan to take some of the stress out of loan repayment.
Barter it out. If money is scarce, perhaps another deal can be worked out. "Instead of being repaid in cash, ask your friend for a favor, like promoting your business for free or doing an important project," says Davies. "Heck, you can even ask him or her to do some housework for you." Baby-sitting, pet-sitting and rides around town are a few more things that anyone can do.

Money is often a source of stress between friends and family, but it doesn't have to be. Be smart, clear and intentional with your loan and hopefully everything will be just fine in the end. It's one thing to lose some cash, but entirely another to lose a loved one over a money dispute.

Now That's Important

There are some pretty crucial signs that'll tell you if a person will pay back a loan, or not. "Before even considering lending money, set emotions aside and contemplate who this person you are lending to is," says Adam Garcia, founder of The Stock Dork. Red flags are a bad financial track record or destructive habits, like habitual drinking, drug use or gambling. "Family or not, you'd be surprised what people are capable of when their judgment is frequently impaired."