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Are you one of life’s lenders?

Posted 07 December 2015 by Christine Walsh

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Are you one of life’s lenders? Being generous can be great, but do you ever put yourself at financial risk because of it? Learn how to lend responsibly to friends and family with our blog.

 

Inevitably in life, our friends and family will have times when they need a little financial support – just as you could find yourself short of cash when you really need it. You might find yourself at the bar and a mate can’t afford their round, so you cover them. Or a relative can’t really afford that family meal you planned, so you offer to pay for them. Sometimes, someone close needs a bigger loan to cover something substantial, like their rent or a household bill. 

 

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But what if it always seems to be you that does the helping and, just sometimes, it puts you in a tricky position yourself? And even worse, what if that relative who promised they would pay you back hasn’t done so, and doesn’t show any signs of doing so anytime soon?

In this blog we’re going to have a look at the issues surrounding lending to family and friends, whilst making sure that you know the most important things to consider. 

We're a nation of lenders

If you feel under pressure to help family or friends out financially, you’re not alone. According to the Daily Mail people lend £272 a year, on average, to friends and this costs us a staggering £370million a year! The article also highlights the problems that can arise from these kinds of arrangements as some people, a quarter of people questioned in fact, said that they had argued or lost a friend over the money. 

This is obviously the worst case scenario, but there are precautions you can take so that you don’t end up damaging a relationship. 

What you need to consider

If you’re considering lending money to someone close, or have been asked for some cash, then make sure you read through our list of the things you should consider before you go ahead. 

Can you afford it?

This is number one. Having a generous nature is a wonderful thing, but don’t fall into the trap of giving if you’re under financial strain yourself, or if it would leave you with nothing to fall back on. Perhaps you do have a couple of hundred you could lend, but what if you do and then your washing machine breaks or the car needs a repair? You shouldn’t find yourself shouldering a financial burden that you just can’t manage because you lent money to someone, and you shouldn’t feel under pressure to lend just because you have in the past. Lending to someone, even someone you care about, should never leave you financially vulnerable. 

Of course, it could be possible that you can afford some, but not all, of what they need. Perhaps you could propose lending some of what they’ve asked for and, if you like, help them find other ways of raising the rest of the money. 

How likely are they to pay the money back?

This can be a sensitive subject, as it really comes down to how responsible you believe the other person is.  According to the Mail one in ten people haven’t been paid back, so you do need to think carefully about who you’re lending to and the likelihood that they will pay what they owe. Do they still owe you or other family member’s money and are now asking for more? If so, this could be a bad sign that their situation isn’t improving as they thought it would, and that you might not see your money again if you agree to the loan. 

In this situation, you could tactfully ask whether they are coping and try to get to the bottom of why they’re short of cash to begin with. It might be that they’re struggling to repay debts that you could never really help with – a loan from you would be a short-term solution to what is a long-term and serious problem. If this is the case,  you would be helping your friend or relative out a lot more if you suggested that they speak to a debt advisor and looked into a debt solution. Our advisors are available to speak to using the options on the left of the page, and The Money Advice Service has lots of free and impartial information on the different routes out of debt. 

If you absolutely know you can afford the loan, but think it’s unlikely that you’ll get the money back any time soon, consider whether it will be easier to just give them the money as a gift. It might be better to do this than to feel mounting frustration and annoyance as time goes on and they still haven’t paid you back. As we said earlier, just make sure that you can afford the gift and feel comfortable giving money to that particular person. 

Don’t rely on memory

If you’ve made an agreement with someone to lend them money and talked about how and when they’ll pay you back, don’t rely on their memory – get the details written down. 

Jot down how much you’ve lent them, what it’s for and how and when they’re going to pay you back. For instance, will you get it back all in one go in six months’ time, or in small instalments over the next six months?  Having something written down to refer to will make the borrower commit to a repayment plan, and can save a lot of aggravation further down the line. Make sure that you both know what’s in the agreement and that you keep it safe. As you are lending your friend or relative money, they should be fine with agreeing to some terms. If they don’t understand why you’re doing this, or seem upset about having an agreement to repay you, this could be a warning sign. 

It’s difficult to advise people one way or another when it comes to this subject, as the way people feel about lending and borrowing with family and friends can vary so much. How much they’re being asked for, what it’s for, your own situation, whether you’ve been asked before and the financial habits of the person in need are all factors. It’s not a case of saying “never lend to people you know” but rather “have you thought it through?”

Helping people out every now and again, especially if they are family or close friends, is a good thing to do and can give you a real sense of satisfaction. You just need to make sure that you’ve looked ahead and are being realistic about what you can afford and also the likelihood that you will get it back. 

 

by Christine Walsh

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