This proverb has been proved time and time again. The gist of this is that: you should never loan money to friends lest you want to get in an awkward situation of trying to get back the loan and eventually putting some strain in your friendship.
I, myself, have tried to find creative exceptions around this to my own detriment. I find that I'm not a good creditor (i.e., I don't have the gall to confront people of their loans and try to get it back). Furthermore, I do not believe in "interest" on loans (both in terms of morally and also in terms of its economic foundations), so I do not charge interest (on that point, banks and creditors should not as it is usurious). And "friends" tend to gravitate toward me because of these. And those who owe me tend to abuse these "acts of kindness." And I find that loans they owed me never really get repaid.
In this sense, the proverb also has another pragmatic meaning: when you loan money to friends, you'll discover that most of them are not really your friends.
Friendship is a reciprocal relationship. As a friend-creditor, you lend money to your friends because you want to help a friend-in-need and keep the relationship. As an act of reciprocity, you expect that friend to also want to keep that relationship by keeping with the promise to repay the debt. Thus, an act of defaulting to a debt especially with a friend negatively affects the relationship.
So hard as I find it, I have resolved not to lend out to friends... for our friendships' sake.
