Answered by Shaykh Faraz A. Khan
Question: How do I pay zakat on money lent out?
Answer: Assalamu alaikum wa rahmatullah,
I pray this finds you in the best of health and faith.
For money lent out, you may either:
(a) pay zakat on it each year while it is lent out (as you have been doing);
(b) wait until you receive it back, at which time though you will have to pay zakat for the past years in which it was lent out. If the loan is never repaid, you owe no zakat on it.
[Ibn Nujaym, al-Bahr al-Ra’iq]
You may want to choose the second option considering your financial situation.
And Allah knows best.
Checked & Approved by Faraz Rabbani