Around 4.6 million adults in the UK borrowed from friends or family in 2022, according to the latest Financial Lives survey from the Financial Conduct Authority (FCA).
Often it is for good reason; a recent NerdWallet study has found the most common motive for asking to borrow money from friends or family is to pay a bill, such as a mortgage or utility payment.
But lending to people you’re close to can be risky.
The same survey found that two in five (41%) of those who had lent money to or borrowed from family or friends experienced problems.
This included disagreements over the amount borrowed and the amount or timing of repayments.
The impact of these disagreements can be far-reaching. Not only financially, but relationships can be damaged or destroyed.
Here, we discuss the risks and precautions you can take with the experts.
Money misunderstandings
Lenders can feel betrayed if they don’t get their money back as agreed. In contrast, borrowers may feel victimised and judged if they can’t repay, according to money coach and financial educator Martha Lawton.
She says: “Sometimes people who have borrowed money will ghost the person who lent it to them because they are too embarrassed to admit they can’t afford to repay them. This can compound the hurt. Other people can get defensive and this can cause arguments and ill-feeling.”
Lawton also explains that the lender could try to monitor or control the finances of the person they lent money to and make judgments about their spending without knowing all the facts.
“Taken together this means that lending money to friends and family can cause misunderstandings and arguments,” she adds.
‘A new power dimension’
Lending money to a loved one can also be particularly risky if you already have a complicated relationship.
Vicky Reynal, a psychotherapist who also focuses on people’s relationship with money, and author of upcoming ebook Money on Your Mind, says: “Through money, you are introducing a new power dimension to your relationship where suddenly one ‘owes’ and one ‘is owed’.
“I have seen difficult money dynamics when loans happen within families. If, for example, you are carrying some degree of anger and resentment, even if unconscious, towards a parent, you might end up acting out your feelings through money. You might borrow money from them and then find that you delay or forget to repay them, knowingly or inadvertently setting up a dynamic in which they are the ones who are now angry with you.”
She adds: “Money can do the talking for a lot of emotional issues that were left unspoken in the relationship. This is why it gets so messy when we lend to people who we have an emotional involvement with.”
It’s OK to say no
Whatever your relationship with someone, if you can’t afford to lend them money, you should always say no. Don’t feel pressured or guilt-tripped into lending money you can’t spare, as this can create financial difficulties for you.
But it can be difficult to say no to a loved one, so Reynal offers some advice on how to approach this conversation.
“If you do it in a kind way, explaining your reasons in a way that is considerate and sensitive to their feelings, it can feel empowering and it will certainly feel better than lending begrudgingly.
“If you are worried it will interfere with your relationship with them, you might want to start by saying that your decision seeks to preserve or protect the relationship, and you hope they might be able to overcome the frustration of your ‘no’ and see the good intention behind it.”
Taking precautions
If you can afford to lend to a friend or family member, you could consider offering it as a non-repayable gift, potentially making it easier to protect the relationship.
But, if you do want the money back, it’s important to clearly state in writing when and how the borrower will repay you, to try to avoid any future disagreements. This can include whether you are happy to be repaid in instalments and what would happen if you didn’t receive a payment.
Lawton points out that you may be more likely to get your money back by agreeing to take smaller, regular payments, as opposed to the whole sum in one go.
If the person borrowing doesn’t make a payment as planned, Lawton says you should not assume the worst. Unless you have proof to say otherwise, try to accept that they want to pay but are unable to because of a valid reason you’re unaware of.
In this situation, have a conversation sooner rather than later because letting it linger can lead to a build-up of resentment and worsen the relationship.
Before agreeing to a loan, it’s also worth thinking about why the person wants to borrow the money, whether they can afford to repay you, and, if they’ve previously borrowed from you or someone else, whether they repaid that loan as agreed. If you have any concerns, lending money may not be the best decision.
You could support a loved one in many other ways if you don’t want to risk your relationship by lending them money.
For example, you could help out with childcare, invite them around to your house for a meal, or suggest cheap or other free ways to socialise together. You could also help them determine if they are claiming all the benefits and financial support they are entitled to using free calculators from organisations such as EntitledTo or Turn2Us.
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