Borrowing money from family and friends is actually the most common form of borrowing in the UK and typically occurs between parents and children, siblings, spouses and close friends.
The main advantage of borrowing from loved ones is that it surpasses any credit checks and usually does not come with any interest or terms.
Borrowing between close relatives can be closely linked to gifting, such as buying your children a new car, paying for holidays or weddings. But borrowing between family and friends can also be during times of distress including debt problems, business cash problems and funerals.
When executed well, borrowing between family and friends can be very effective, but there is a close line between this and causing resentment and sometimes falling out with loved ones. With this in mind, The One Stop Money Shop offers its guidance on borrowing between family and friends.
When would you borrow between family and friends?
- Buying a house and making renovations
- Starting a business
- School fees and education
- Going out and leisure
- Medical or health
- New car or repairs
- Debt trouble
The role of loan agreements between family and friends
Whilst giving a friend a tenner at the pub certainly does not require a legal agreement, or repayment for that matter, there is a role of having loan agreements for larger amounts or if any form of interest or repayment is expected.
Certainly when it could be a commercial or business arrangement (maybe where the person lending is getting some form of share or equity) – writing down some clear loan terms can ensure a smooth process and reduce the risk of backlash or turning sour.
Basic loan terms could include:
- Names, dates, addresses
- Loan amount
- Interest (if any)
- Expected repayment dates
- Names of parties involved and witnesses
- Implications for non-repayment
- Purpose of the loan
Set a clear repayment date
It is very easy for any loans or money borrowed between friends and family to run continuously and repayment is eventually forgotten.
But, to ensure a good relationship, goodwill and keep the door open for future engagements, it is worth setting a clear repayment date, either contractually or verbally.
Do not abuse the position of trust
The borrower will usually borrow money from their sibling or parent without any prior credit checks, income checks or security (collateral). Essentially, the loan is based on just trust.
As the person borrowing, it is important that you do not abuse this and showing an ability or willingness to repay will always hold you in high esteem.
What to consider when lending to someone else?
It is hard to say no to a close friend or family member when they need to borrow money, but importantly you have to ask yourself whether you can afford it.
In the event that the person cannot repay or will not repay at all – is this an amount that you can live without?
If you have a limited income or are living off a pension, should you decline the offer?
Having a budget and an idea of your financial position before lending out money is advised.
Have you considered the alternatives?
For the individual looking to borrow money, there are alternatives to asking your parents or friends. Whilst payday loans should be used for emergencies only, there are other low cost options such as using 0% credit cards, using an authorised overdraft, taking payment holidays from your current mortgage or car finance arrangement, applying for money through a work scheme or your local credit union.