Borrowing Money from Family & Friends: Is It Ever a Good Idea?
Whether it’s mate’s rates or the bank of Mum and Dad, some may have turned to their nearest and dearest in a time of financial need, and many of us have lent a helping hand to our loved ones if they’ve been strapped for cash.
While most of us would do anything for our friends and family, money is a very sensitive subject. With this in mind, is borrowing and lending money within our immediate circle ever a good idea?
Why it may not be a good idea to borrow money from your family and friends
- Potential feuds
- Possible lack of urgency in paying it back
- A change in circumstances
Sadly, money is at the core of many fallouts.
Starling Bank recently carried out a survey which explored the feelings of those who have lent money to friends and family. 27% of people surveyed were left feeling annoyed when they were not paid back as quickly as they would have liked. A further 8% admitted to feeling angry and having an argument with the person who owed them money. 3% even ended up having a physical fight. Perhaps quite understandably, 17% began to resent the person owing them money.
We may see our loved ones as a somewhat automatic fallback when the going gets tough, but it’s really, really important to think twice before putting someone you care about in a position that may make them feel uncomfortable, or leave them with financial strain of their own.
Is any amount of money worth ruining your relationship?
There may be a risk that you could become complacent when paying the money back.
For example, if refunding your agreed sum would leave you particularly short one month, you may feel more relaxed about prolonging the payment with family than you would a professional lender.
Owing money to friends and family is a big responsibility.
What would happen if you suddenly found yourself in a position whereby you’re unable to pay the money back?
Things such as redundancy or an unexpected bill are things that may hinder your ability to repay the money.
Why you may consider borrowing money from family and friends
- Access to funds without undergoing a credit check
- No impact on your credit score
- Borrowing with low or no interest fees
If you were to apply for a loan – or another type of credit - the lender would carry out a ‘hard search’ on your financial profile. If you’re unemployed, a student, or have a low credit rating or poor credit history, you may find it difficult to get approved for a loan.
Too many hard searches over a short period of time can have a negative impact on your credit score. Similarly, if you are approved for credit and then find yourself in a position whereby you’re unable to make your repayments, your credit score may suffer as a result.
Loans taken out through official lenders accrue interest fees.
It’s unlikely that your family and friends would ask you to pay the same interest rates as lenders on borrowed money. They may even let you off interest rates altogether.
Things to think about before borrowing money from family or friends
If you do borrow money from a family member or friend, remember that it is your duty to pay it back. Before you make the commitment, be sure that your personal circumstances are not likely to change and impact your ability to return the cash.
Be aware that failing to keep your side of the deal may lead to a breakdown of trust.
A family member/ friend has asked to borrow money from me. What shall I do?
You should never feel under any pressure to lend anybody money, regardless of their relationship to you.
There are a few things you might wish to ask yourself before agreeing to lend money.
- Can you afford to lend money?
- How reliable is the person who has asked to borrow money? Can you trust them to pay it back?
- How genuine is their need for money? Do they have a habit of spending recklessly?
- Do you have a plan in place in the event of the money not being paid back to you?
It might sound pedantic, but it may be an idea to put your agreement in writing. Outline exactly how much you are lending, and when you expect it to be paid back. Work out repayments that suit both parties – this may be the whole sum at once, or in staggered amounts.
You could ask another family member, or somebody impartial, to be a witness to the agreement.
If you choose not to lend your loved one money, remember that you do not owe them an explanation. Nobody has any right to put pressure on you or emotionally blackmail you into giving them money.
Are there any alternatives to borrowing money from friends and family?
If your finances could do with a boost but you have decided against asking loved ones to step in, there a number of options to consider.
- Saving up. While this might take the longest, it could work out as the most cost-effective, as the money will be your own and you will not be required to pay any interest rates or fees.
- Taking out a personal loan. A personal loan could allow you to access cash which must be repaid over a pre-agreed term. You will also incur interest. Having a good credit score will increase your chances of being approved for a loan. Loans are huge commitments, and you should only apply for one if you are absolutely certain that you can confidently manage the monthly repayments.
- A guarantor loan. A guarantor loan is a type of unsecured personal loan, and entails a family member or friend with a good credit score guaranteeing that they will help out with repayments in the event that you’re finding things difficult.
Having ‘that awkward conversation’
Talking about money doesn’t tend to come naturally, and there are few things more unpleasant than having an awkward money chat. The best way to combat this – on both sides - is to be open and honest. These conversations are best had face-to-face to prevent any blurred lines in the communication.
Be upfront about what exactly you need the money for, and if you run into difficulty while paying it back, speak up as soon as possible so that everyone involved knows where they stand and can form a suitable solution moving forwards. We totally understand that admitting that you’re struggling is really hard, but ignoring your loved one is not the answer, and things are more likely to sour.
If you’re on the lending end of the transaction and things don’t go according to plan, assess the situation. Being in debt can feel isolating and frightening, so try to be patient. Sometimes, a late repayment could be a genuine mistake and a gentle reminder may be all that is needed. On the other hand, if you feel that your loved one is actively avoiding you and withholding your money, you may choose to take a more assertive approach.
It may be worth pointing your loved ones in the direction of specific money and debt management charities where they can find free, impartial advice. Such websites include StepChange, National Debt Line, Citizens Advice Bureau and MoneyHelper.
Representative example: Amount of credit: £1000 for 12 months at £123.40 per month. Total amount repayable of £1,480.77 Interest: £480.77. Interest rate: 79.5% pa (fixed). 79.5% APR Representative. We’re a fully regulated and authorised credit broker and not a lender