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If you’re struggling to make ends meet, it’s only natural to turn to friends and family members for help. It’s so common, in fact, that a third of people in the UK are currently owed money by friends and family, according to research by Starling Bank.
The amount being lent out by friends and family is not small change, either – 35% have lent more than £500 according to the survey of 2,000 UK adults.
Nearly one in four (23%) are owed more than £1,000, 10% have handed over £5,000 or more, and 6% have lent upwards of £10,000.
But is it ever wise to lend or borrow money in this way? We explore the benefits and (very serious) pitfalls of unofficial lending, as well as provide some tips on how you can make sure both you and your friend or family member is protected if something goes wrong.
Read on to find out more, or click on the links below to go straight to that section.
Broaching the subject of gifting or loaning money to family may be embarrassing, but according to a recent survey of 3,000 people by Hodge Bank, many people actually get a kick out of helping their friends and family with money, with 58% of over-75s saying they liked to lend their loved ones money.
Of course, you don’t have to be a financial wizard to work out why people might want to borrow money from the ‘Bank of Grandma and Grandad’ (or the ‘Bank of Bob from Work’, for example).
Clearly, your friends and family are a lot more likely to give you some help towards bills than a bank ever is; getting a loan is a bureaucratic nightmare, and unless a bank is confident that it will easily be able to recoup its money, it’s not going to lend you a penny.
This preference for wealthier clients by the big banks is why those who are struggling often have to turn to ‘pay day’ loans, or even loan sharks (which we will cover later).
Of course, if you aren’t considered a risk by the banks, they’ll happily give you a loan at a far more-reasonable rate than a rapacious pay day loan provider. But the terms are still unlikely to be anywhere near as generous as you’d get from friends and family.
According to MoneyNerd, the average interest rate on a personal loan taken out in October 2022 with a two-year repayment was 10.16%, although many lenders charge much more, with rates as high as 36% or above.
The amount you are charged will depend on a number of factors, including your personal credit score, and your collateral (i.e. the amount of money/property the bank could theoretically seize if you fail to keep up with installments).
For help working out how much money you could realistically hope to borrow through official channels, see here.
Needless to say, lending or borrowing money from friends and relatives isn’t without risks – for both parties.
Most ‘lenders’ are not particularly wealthy, according to Starling Bank, whose study found that a third of people who have lent money to friends and family are low-earners (i.e. on an annual salary of less than £20,000), while only 11% are higher earners, on £70,000 plus.
What’s more, two thirds of lenders told the bank that they felt either too “awkward and embarrassed” or too “anxious” to ask for money back that they’re rightfully owed, while a third or respondents (32%) said they had to ask two or more times for the money to repaid.
As Starling Bank’s chief banking officer, Helen Bieton, pointed out: “Talking about money with friends and family can be awkward, but letting debts rack up can take a toll on relationships and our own financial wellbeing.”
She added that “nearly one in five (17%) started to resent their debtors and 11% avoided making plans with them in the future”.
“When they weren’t paid back as swiftly as they would have liked, more than a quarter of people in the UK (27%) got annoyed, 8% got angry or had an argument with the person who owes them [money], and 3% ended up in a physical fight.”
Of course, the easiest way to avoid such potential disputes is to just say no. However, this is easier said than done.
In July, a study from the short-term lending service Moneyboat revealed that the average Briton loses over £500 a year due to this inability to assert themselves with friends and family.
As Elizabeth Richie, a psychotherapeutic counsellor at St Andrews Healthcare, explained: “Expectations from friends and family can blur the lines when we want to say no! This may include fear of being judged, fear of being selfish.”
Richie, who helped Moneyboat with the study, said that it is crucial to set boundaries and be mindful of the fact that “we cannot control other people’s responses to us”.
“The ability or inability to say no often stems from our childhood. We will struggle to say no when we are constantly seeking approval, we will find it easier to say no when we have experienced healthy attachments in early life and have acquired a healthy identity from our early caregivers.
“Ultimately being able to say no at the right time reduces stress levels, and gives you time to prioritise what is important for you and to be more discerning about your own needs and self-care without feeling bad.”
There are, however, far greater risks involved with casual borrowing than just hurt feelings, as Jackie Spencer, the senior policy manager at the Money and Pensions Service, explained: “Another thing to be cautious about is borrowing money from someone you know casually, such as a colleague or a friend.
“It might seem like a good solution, but you should consider how much you really know them, as they might be a loan shark who lends money illegally and the loan could cost you more than you think.
“They target people who need to borrow money and can’t access it from legal sources and may resort to intimidation and even violence if you can’t keep up with repayments.”
To help prevent this, she stressed that any informal loan should be put in writing, and recommended people read this guide on how to spot a potential loan shark.
While it can be tempting to ask friends or relatives to lend you money, you need to think about not only whether you can afford to repay the loan but what might happen if you can’t.
People thinking of borrowing from friends and family really ought to draw up a budget using a resource like this, just like someone would do before approaching a bank for a loan.
“This will help you see how much money you have left for repayments and if you can actually afford it,” said Spencer.
“You should also consider the risk that this could harm or even end the relationship if the money is not repaid. It’s stressful enough if you can’t afford to pay back what you owe, but it can be even worse when you’re leaving a loved one out of pocket.
“If you’re not sure whether you should borrow from a friend or family member, there are other credit options – even if you have a poor credit rating and if you’re struggling with debts, there is help available through our MoneyHelper service.”
It can be hard to refuse when a friend, partner or family member asks for financial help, but you should consider whether you can cope with the impact of not having the loan repaid. Take the time to work out your own budget before lending to anyone.
If your money is currently in savings, you’ll need to bear in mind that removing a large chunk of this will affect the interest you make each month.
If you are able to help a friend or relative in need, it’s still wise to take some legal precautions to safeguard both you and your loved one in case of unforeseen circumstances.
As Spencer from the Money and Pensions Service pointed out, it’s a good idea to put your agreement in writing so both parties were aware of exactly how much will repaid and when. “It’s also important to keep records of when repayments are made, so you both know how much is still outstanding.
“Having an agreement in place can protect you in unforeseen circumstances as well, such as if the borrower died with the debt unpaid as you’d need proof to claim from their estate.”
You can find lots of free template agreements online that both parties can sign and keep.
LawDepot has a very easy-to-follow, one-page form that should leave both sides in no doubts as to what was lent, and to whom. You can download it here.
The team at Hodge Bank has some great advice on things to consider before lending to friends and family. For instance, they suggest you should include details such as “a time frame for when the sum is expected to be paid back by, any interest (if applicable) and any consequences for missed payments – you may choose to set a fixed penalty or an interest charge for example.”
The bank also tells would-be lenders to consider things like collateral, adding: “If your friend or family member has anything of worth, this can be a good way to ensure your money will be returned to you.
“If your money was in savings prior to the loan, it may be a good idea to charge at least as much interest as it’d earn in savings to make sure that you don’t lose out. This will also ensure that the loan is seen as a loan and not a gift.”
Another issue many people overlook is the tax implication. If there’s interest being added to the repayment amount, you really ought to inform HMRC and fill out a self-assessment form as, depending on your income, the interest on any repayments may be liable for tax. Obviously, if you’re not charging interest, you won’t need to tell HMRC and, instead, just need to keep a detail of the loan and repayment amounts, in case you’re challenged about where the money came from.
Of course, it’s worth pointing out that many relatives (especially older ones) loan out money on the understanding that they probably won’t need it to be repaid.
It’s worth pointing out, however, that if the lender dies within seven years of giving the money away, the recipient may have to pay inheritance tax on it. For more information about inheritance tax, read our guide on estate planning.
When lending to family and friends, there’s always the chance that they might not pay you back. If this happens, the first step is to talk to them and find out why this is. It may be due to something simple like a change in personal circumstances or other reasons beyond their control.
If the issue is due to a lack of funds, you should try to come to an agreement to amend the payment schedule or increase the length of the loan-period. If your friend or family member is being difficult and there’s a signed agreement in place, you can always seek legal action, if necessary.
For sums below £5,000, you have the option of taking the issue to a small claims court. For larger amounts, you may need to seek legal advice on how best to proceed.
If you or your loved ones are struggling financially, you really should try to reduce any debts and do everything you can to consolidate your finances before complicating the situation with yet more IOUs.
Charities like Christians Against Poverty give free help and advice to people struggling to keep their head above water financially – irrespective of their religion.
Its advisers should be able to help you cut your budget and get lenders off your back.
They work very closely with local Council Tax and Business Rates’ enforcement departments to create more-manageable payment plans for people who’ve fallen behind and are racking up court fees and penalty notices.
They also help arrange Individual Voluntary Arrangements, Protected Trust Deeds and Debt Relief Orders to clear any money you owe private businesses.
The charity has helped more than 20,000 become debt-free since 2010 alone, so they know what they’re doing.
You could also try Citizens Advice or Turn2us, who can not only provide some advice on clearing debts and dealing with angry lenders, but could also point you in the direction of benefits or other assistance you may not know you are eligible for.
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MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of lending or borrowing money should conduct their own due diligence.