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Should I lend money to family and friends?
It’s a question that causes much consideration. You want your friends and family to be happy and secure. You may feel that it’s your duty to help them out, even at the expense of your own needs.
With that said, not being able to lend money to loved ones doesn’t make you any less loyal a friend. Like the saying goes ‘you must help yourself before you can help others’.
For many people who are struggling with debts or low income, lending money to family and friends is simply off limits. The risk of causing tension or even ruining a relationship is too high. It could be down to personal preference, or maybe your financial position allows you (or doesn’t allow you) to help. Either way, if you’ve been asked to lend money to family or friends, here are some things to consider first.
If someone is asking you to borrow money, or if you’re considering borrowing money from family or friends, it could be the sign of a debt problem.
Research we put together in the first half of 2016 shows that 28% of StepChange Debt Charity clients now owe money to friends and family. The average amount borrowed is now more than £4,000.
Of course, this may not always be the case but if you, or a family or friend, are concerned about money problems, free debt advice and support is available.
Make sure you understand why they need the money and can’t afford something on their own. It may be that they need help with a large purchase, like a car, which is more understandable than someone who needs to borrow next month’s rent.
Can you actually afford to lend the money? If the answer’s no, or if you’re unsure, it’s almost certainly a bad idea.
Don’t feel pressured into lending someone else money. You’re (probably) not responsible for their financial situation. Make sure you don’t end up worse off because you’re helping out someone else. Friendship is a fragile thing, and is never worth putting at risk over money. The best way to prevent this happening is to never bring money into the equation.
It sounds mean but a true friend wouldn’t expect you to put yourself financially at risk for them. Even if they’re absolutely desperate for help, they would care about you enough to not want to also see you in a stressful situation.
If a friend or family member tries to guilt you into lending money, don’t be afraid to question them over their behaviour. Fear can make people behave in uncharacteristic ways. If they’re concerned about debts, let them know free debt advice is available.
You’ve worked out that you can afford to lend your friend or family member the money. What about if you never get the money back? Can you handle this financially?
You may not need the money right now, but you could face an income shock, such as a separation, illness or unexpected bill, in the future.
It’s important to consider this before making a decision. If you’re lending money that could be used as your emergency fund, it might not be such a good idea.
What impact could lending money to a family member or friend have on your relationship?
Are you going to resent them for spending money elsewhere when they could be paying you back? Would you feel comfortable asking them for repayments if they started to avoid them?
If you don’t get the money back, how would this make you feel?
It’s important to think about the different scenarios that could affect your relationship. You should be open and upfront about any concerns you have over lending the money. Address these with the person asking for the money, so you can both discuss them openly.
If you’ve agreed to lend someone money, set expectations about when you’d like to get the money back.
If you’re not going to get the money back all at once, agree a repayment plan. You should also decide the best way to approach the situation if payments are missed. Agree that it’s OK for you to remind the borrower they’ve forgotten to pay. This will help it feel less awkward if you do have to chase them about repayments.
If you’re linked financially to someone else, for example your partner, you should talk to them about the possibility that this money will be lent.
You need to make sure they’re comfortable with the situation as well.
Also consider their relationships: does their partner know about the borrowing? Are they borrowing because of their partner’s debts? Will the borrowing affect your relationship with your grandchildren?
Your friend or family member could just be asking for cash, or they may be expecting you to enter into a joint credit agreement with them.
A cash agreement is simpler, as this way you’re not financially connected to them.
If they want you to take out a joint loan or a credit card in your name for them, you should think very carefully about doing so. If your name’s on a credit agreement you’ll become liable for the money if they don’t pay. If they default on payments, it’ll impact your credit file too because you’ll be linked financially.
When you’re lending cash, write up an agreement for you to both sign. Outlay the details of the amount loaned, the repayments expected, and the due date for the final repayment. Make it clear that it is a loan to be repaid: otherwise, if things go wrong between you, they could claim it was a gift and not repay you at all. An agreement like this also helps you create a paper trail for any tax reasons: for example, giving any amount over £3000 to family members in a year could affect inheritance tax. If you make it clear, in writing, the amount provided is a loan, this will not affect inheritance tax.
Another way you could be asked to support someone financially is by acting as a guarantor for a loan. Again, think carefully about doing this. Acting as a guarantor means you agree to pay money on behalf of the borrower if they don’t pay. If this were to happen could you afford the repayments on top of your other financial commitments?
Before you agree to act as a guarantor, you also need to think carefully about the interest rate the lender is charging. Guaranteed loans from the main brands have around a 50% interest rate (also called APR) which is much higher than a typical high street bank loan. If you sign up as a guarantor, you are responsible for payments at this rate of interest if the borrower defaults. If your own credit rating is not too bad, you could consider borrowing a loan in your name at a lower interest rate.
So you’re about to lend your friend money but you know realistically you’ll probably never get it back. Is there some way they could repay you that doesn’t involve money?
Have a think about your friend’s skills and how they could benefit you. For example, they may be a whizz at PC repairs. Your PC might be fine now, but you could ask your friend to commit to fixing the PC should it break. Other ways they could repay you include:
There’s a knack to how you should frame this with your friend. It’s usually embarrassing enough for them to have to come ‘cap in hand’ to someone for money, but knowing that it’ll probably never be paid back can make a person feel worse.
Try saying something like ‘I know you would pay me back ideally, but I don’t want to add to the difficulty you’re feeling right now. Instead, do you fancy doing ___________ for me? It would be such a big help / I’d really appreciate it etc.’
Removing the pressure to pay back and throwing your friend a little flattery can make them much more willing to ‘work off their debt’.
If you’ve decided that you can’t or don’t want to lend your friend or family member money, try not to feel bad about your decision. Instead, you could make this into a productive thing, by asking if there’s anything else you can do to help.
Maybe you could look after their kids if they wanted to take on extra hours at work. You could even see if you can help them with budgeting or suggesting ways they could increase their income.
If they’re struggling with debts let them know they don’t have to deal with them alone. Stepchange offer free and impartial debt advice through our online debt help tool, Debt Remedy.
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