Money and friendships can be tricky. Lending to a friend isn’t always straightforward, especially when the amount gets significant. It can strain your relationship and finances if not handled properly.

When a friend approaches you for financial help, your first instinct might be to agree. After all, they wouldn’t ask unless it was crucial. Studies show that over 90% of young people would consider lending to family. But, more than one-third of lenders report negative outcomes, ranging from lost money to damaged friendships.

While declining a request can be uncomfortable, addressing the issue upfront can prevent future heartache. Here’s a straightforward approach to manage this delicate situation.

Only lend what you can spare

This might seem obvious, but it’s worth reiterating: Never lend money you can’t afford to lose. If your finances allow, then consider helping, but don’t stretch your budget thin. Think creatively about how to assist without impacting your own financial security.

Assess the financial situation

If you’re in a position to assist, take a closer look at your friend’s financial needs. Discuss what expenses they need help with and ask how they plan to repay you. If you have budgeting skills, you might even offer to help them review their finances to identify potential savings, as suggested by Elizabeth Carroll, a financial coach.

Document the agreement

For clarity and peace of mind, put the loan terms in writing. Outline your expectations and any conditions that will help you feel secure about the arrangement. If your friend is hesitant about a formal agreement, consider it a warning sign that you might need to rethink the loan.

Be honest about your limits

If you can’t lend the money, be straightforward. A simple, “I can’t help right now,” is a respectful way to maintain the relationship. It’s far better to be upfront than to lend money you don’t actually have, which could lead to a financial bind and unnecessary stress.

Open communication is key. Keeping your budget and conscience clear will allow you to maintain a healthy friendship.