Your friend calls you and tells you about a thought-provoking business idea. You love the idea – you can see the business’s potential; you believe it can grow rapidly and become a unicorn one day. But the problem is, your friend does not have enough cash to pump into the business. What if you could get a loan on behalf of the other person and lend it?

How can you help your friend who needs financial aid?

An Economic Times article highlights the truth that the pandemic added 75 million people to India’s poor class. If you were fortunate enough to have retained your job or your business did just fine, you should consider lessening the burden of your friend, who probably lost more than just his source of income. You can choose to opt for a personal loan and extend its benefits to your friend.

But should you take a personal loan to help a friend in need?

This depends on many factors, and it is entirely a personal choice. You must decide whether or not taking a loan under your name for your friend is a wise decision. Such a decision could have long-term consequences – it could affect your financial health and destroy relationships. Here are some utilitarian tips to help you make that decision: 

• Consider the circumstances your friend is going through

Taking out a personal loan to help someone else is a big deal. If you take such an important step, it should be for a crucial and genuine need. Merely lending money to get the other person’s approval, or as we say, ‘to look cool,’ should not be the factor driving your decision. If you lend out the money to someone who will not use it wisely, it will hurt your financial freedom in the long run, maybe even make life difficult for your family members. 

• Consider the repayment capability of your friend

In such a situation, two loan transactions are involved—one where you take a personal loan from a lender, and the other where you pass on the money you have received to your friend. You will receive EMI from your friend and then use that money to pay EMI to your lending institution. Understand that the agreement you have with your lender is a formal agreement, and if you cannot meet your financial commitments, it could lead to dire consequences. However, the agreement you have with your friend is more informal, and it might become difficult for you to recover debt from a friend.

Factor in the credit history of your friend, and assess the worthiness of taking this risk upon yourself. If you decide that you must go ahead, fulfil the personal loan eligibility requirements and be a good friend.

What are the prerequisites to consider before lending?

Be sure to manage your finances well before you can extend a helping hand to someone else. Make a plan that will help you to meet your financial requirements. Compare personal loan interest rates prevailing in the market and go ahead with the best-suited one. You can use your lender’s personal loan EMI calculator to manage funds. Managing your funds and finances should be your priority.

Summing Up

You should prepare a detailed loan agreement before lending money to your friend. This way, as the lender, you will be able to enforce compliance with the loan terms and seek payback in case of a default. Do your due diligence before lending money, and make sure that you know all the risks associated with such lending.