# Lending Money to a Friend? How to Do It Without Losing Both > Lending money to a friend goes wrong in predictable ways: vague terms, no paperwork, and awkward silence when a payment is late. Here's how to set it up so you keep the money and the friend. Source: https://phonenumbercreditscore.com/blog/lending-money-to-a-friend Author: Jordan Avery, Head of Content Published: 2025-06-23 Topic: Business & Personal Publisher: Phone Number Credit Score (https://phonenumbercreditscore.com/) Lending money to a friend works best when you treat it like a real loan with friendly terms, not a favor with fuzzy ones. Lend only an amount you could survive losing, agree on a payment schedule out loud and then in writing, and decide ahead of time what happens if a payment is late. Do those three things and most friend loans end fine. Skip them and you get the familiar story. Six months later, your friend posts vacation photos, you haven't seen a payment since March, and neither of you knows how to bring it up. What follows goes in the order you'll actually face it, from the conversation before you say yes to the tax rules most people never hear about. ## The rule that comes before the rules Ask yourself if you could afford to never see this money again. Not "it would be annoying." Actually afford it. That's not cynicism. Friends ask friends for money usually because a bank said no or would charge too much, which means the loan carries more risk than average from the start. The Federal Reserve's [survey of household finances](https://www.federalreserve.gov/newsevents/pressreleases/other20250528a.htm), published in May 2025, found that 63% of adults would cover a $400 emergency expense with cash or its equivalent. Flip that around: more than a third couldn't, at least not easily. If your friend is in that group, a bad month on their end turns into a missed payment on yours. If the honest answer is "I couldn't afford to lose it," you have three options: lend less, give a smaller amount as a gift, or say no kindly. "I can't swing a loan right now, but I can give you $300 toward it" is a sentence that has saved a lot of friendships. ## Five questions to ask before lending money to a friend These aren't an interrogation. They're the questions a lender would ask, phrased like a friend. **What's it for?** A car repair so they can keep getting to work is a different risk from a vacation or a business idea. The purpose tells you whether the loan helps them earn the money to repay it. **How much do you need, exactly?** People round up. Ask for the number and what it covers. **How will you pay it back, and when?** Listen for a specific plan: "$250 from each paycheck for ten paychecks." "As soon as things pick up" isn't a plan. **Have you tried anywhere else?** If a bank turned them down, it's fair to ask why. If they haven't tried, a credit union personal loan might serve them better than you can. **What happens if you can't make a payment?** Asking this up front makes it a normal topic instead of an accusation later. ## Look at their credit, with their blessing This is the step people skip because it feels rude. It doesn't have to be. Try something like: "I'm happy to help. Before I lend this much, would you be OK with me running a quick soft credit check? It won't affect your score. I just want to make sure the payment plan works for both of us." Most people say yes. If someone gets defensive about a soft pull on a $5,000 loan, that's information too. The FCRA only lets you see someone's credit with a permissible purpose, and the simplest one is their written OK. A text that says "yes, go ahead and check" is fine. Keep it. (Our posts on [whether it's legal to look up someone's credit](https://phonenumbercreditscore.com/blog/is-it-legal-to-look-up-someones-credit) and [getting written consent for a credit check](https://phonenumbercreditscore.com/blog/consumer-consent-credit-check) cover the details.) With our lookup you only need their phone number. You get the name and address on their credit file, their real FICO® Score 4 from TransUnion, and a profile summary. It's a [soft pull, not a hard one](https://phonenumbercreditscore.com/blog/soft-pull-vs-hard-pull), so their score isn't touched. ### What to actually look at The score is a summary. The details are where the story is. - **On-time payment record.** Someone at 99% on time who hit a rough patch is a different borrower than someone with lates every few months. - **Credit usage.** If their cards are at 90% of their limits, your loan may just be filling the gap until the next shortfall. Our guide to [credit utilization](https://phonenumbercreditscore.com/blog/credit-utilization-explained) explains what the numbers mean. - **Collections.** Unpaid collections mean other people have already tried to get paid and given up. - **Total debt.** Compare it to what you know about their income. Here's an example. Your friend Dev asks to borrow $6,000 to fix his car and cover a gap between jobs. With his OK, you run his number, (555) 555-0163. His FICO Score 4 comes back at 618. His cards are at 88% of their limits, and he has two 30-day lates in the last year but no collections. Nothing there says "don't lend." It does say a $6,000 loan repaid at $250 a month is ambitious while he's between jobs. Maybe you lend $3,000 now, with payments starting once he's working, and revisit after that. If you want to see account-by-account history (every card, every lender, two years of payments), there's an add-on for that, described on [how it works](https://phonenumbercreditscore.com/how-it-works). For a friend loan, the summary is usually enough. ![Two women sitting at a table with drinks, talking face to face](https://phonenumbercreditscore.com/media/blog/01a1366f-6866-736a-8639-661cb0ef5fbe-1200.webp) ## Put it in writing, even if it feels formal A written note protects the friendship more than it protects the money. Memories drift. Paper doesn't. A simple promissory note covers: 1. Both names and the date. 2. The amount lent. 3. The interest rate, even if it's zero. 4. The payment schedule: amount, frequency, first and last due dates. 5. Where payments go (your bank account, a payment app handle). 6. What happens with a late payment, such as a grace period before you talk. 7. Whether they can pay early without penalty (they should be able to). 8. Both signatures. Templates are easy to find, and a local attorney can draft one cheaply if the amount is large. Have both of you keep a copy. Then set up an automatic transfer from their side so neither of you has to think about it each month. ## Interest, the IRS and the $10,000 line Most friend loans are small enough that taxes don't come into it. Here's where that changes. **Below-market loans.** The tax code treats a loan with little or no interest as partly a gift, under [26 U.S.C. § 7872](https://www.law.cornell.edu/uscode/text/26/7872). For gift loans between individuals, there's a de minimis exception: if the total outstanding between the two of you is $10,000 or less, the rule generally doesn't apply. For loans up to $100,000, the imputed interest is capped at the borrower's net investment income, and it's treated as zero if that income is $1,000 or less. **The safe rate.** If you lend more than $10,000 and want to avoid the issue, charge at least the [applicable federal rate](https://www.irs.gov/applicable-federal-rates), which the IRS publishes each month. Short-term rates apply to loans of three years or less. **Gifts.** If you'd rather just give the money, the annual gift tax exclusion for 2025 is $19,000 per recipient, according to the [IRS gift tax FAQ](https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes). Give more than that and you file a gift tax return, but you almost certainly won't owe tax, because it counts against a lifetime exemption in the millions. **Interest you receive is income.** If your friend pays you interest, you report it. This is general information, not tax advice. If the numbers are big, a short call with a CPA is worth it. ## When a payment is late Bring it up early and lightly. The first missed payment is the cheapest one to talk about. "Hey, I didn't see the transfer this month. Everything OK?" is enough. Listen to the answer. If there's a real problem, adjust the schedule in writing: smaller payments, a pause, a new end date. A modified plan that works beats a perfect plan that doesn't. What doesn't work: hinting, complaining to mutual friends, or waiting until you're angry. By then the conversation is about the friendship, not the money. ## If they never pay you back At some point you may decide to stop chasing. You have two clean ways out. You can forgive it and call it a gift, which ends the tension. Or, if it truly was a loan and it's now worthless, you may be able to deduct it. The IRS treats an unrepaid personal loan as a [nonbusiness bad debt](https://www.irs.gov/taxtopics/tc453), deductible as a short-term capital loss in the year it becomes totally worthless. You have to show it was a genuine loan with an expectation of repayment, which is one more reason the promissory note matters, and that you made reasonable efforts to collect. Small claims court is an option for amounts under your state's limit, but suing a friend is rarely worth what it costs the friendship. Decide in advance where your line is. ## Other ways to help Sometimes a loan isn't the right tool. **Pay the bill directly.** If the money is for a mechanic or a landlord, paying them yourself guarantees it goes where intended. **Co-signing is riskier than it looks.** Co-signing a bank loan puts the full debt on your credit report, and as the CFPB points out, a co-signer is [equally responsible for paying the loan back](https://www.consumerfinance.gov/ask-cfpb/should-i-agree-to-co-sign-someone-elses-car-loan-en-813/) if the borrower stops. Read [before you co-sign](https://phonenumbercreditscore.com/blog/before-you-cosign-a-loan) first. **Going into business together** is its own category with its own checks, and a different legal footing for looking at someone's credit. Our guide to [permissible purpose under the FCRA](https://phonenumbercreditscore.com/blog/permissible-purpose-fcra) explains which reasons count. One last practical tip: put a reminder in your calendar for the day after each payment is due. If the money's there, you never think about it. If it isn't, you send the easy text that day instead of stewing for a month. The rules for checking a friend's credit are on our [compliance page](https://phonenumbercreditscore.com/compliance), and a lookup starts from the [home page](https://phonenumbercreditscore.com/) with just their number. ## Frequently asked questions ### Do I have to charge interest when lending money to a friend? Not for small loans. Under the tax code, gift loans between individuals that total $10,000 or less are generally exempt from the below-market loan rules. Above that, charging at least the IRS applicable federal rate avoids imputed interest headaches. ### Is a handwritten IOU legally binding? Often, yes, if it shows who owes whom, how much, and that the borrower agreed to repay, and it's signed. A short promissory note with a payment schedule is much stronger, and you can find templates or have a lawyer draft one for a modest fee. ### Can I check a friend's credit before lending to them? Yes, as long as you have a permissible purpose under the FCRA, and the cleanest one is their written OK. Ask first and keep the text or email where they agree. A soft-pull lookup won't affect their score. ### Can I deduct a loan my friend never repaid? Possibly. The IRS treats a worthless personal loan as a nonbusiness bad debt, deductible as a short-term capital loss, but only if it was a real loan with an expectation of repayment and it's totally worthless. Gifts don't qualify, which is another reason to put the loan in writing.