Should You Borrow and Lend Money to Friends and Family?

Read our blog to learn about the pros and cons of borrowing money from friends and family and other solutions so you can make an informed decision.
Amabel Polglase
April 11, 2023
min read

Deciding whether to borrow or lend your friends and family money can be tricky. If you or the people you care about are struggling financially, it’s normal to want to help each other out. But doing so can sometimes do more harm than good to your relationships.

It can seem like a no-brainer when you think about the benefits of lending money to or borrowing money from your friends and family. After all, these are people you trust and who have your best interests at heart. Why wouldn’t you help each other out?

However, as soon as you get money involved with your close relationships, you’re taking a huge risk.

Let’s look at how you can navigate a friend and family loan – and whether the reasons to borrow money from friends and family (or lend it to them) make it worth it.

What are the potential risks and benefits of lending money to friends and family?

While there are good reasons to borrow money from friends, and multiple benefits of lending money to them, there are at least as many drawbacks.

On the one hand, you’re helping someone you care about avoid financial difficulty. Conversely, giving a friend or family member a loan might make your relationship awkward for the loan’s duration. It could even damage your relationship permanently.

For this reason, it’s essential to weigh the reasons for borrowing money from friends or becoming their lender with the drawbacks.

Benefits of borrowing/lending to family and friends

·   Lower interest rates – usually, loans exchanged between friends and family come with a lower – or even a zero percent – interest rate compared to higher-interest alternatives like bank loans.

·   Flexible repayment plans – a friends and family loan will typically be more flexible, so if you need more time to repay your loan, you can – with fewer financial consequences.

·   No specific financial requirements – with a bank loan, you’ll be approved or rejected based on your finances. With a friends and family loan, there’s no such requirement making it a more feasible option for some (though, of course, the person can still say no).

Drawbacks of borrowing/lending to family and friends

·   You jeopardise your relationship – whether you lose trust in each other, someone feels unfairly pressured into repayment, or the friendship feels awkward after money is exchanged, borrowing and lending money can damage your relationships. Make sure that if you borrow money, pay it back on time to protect your relationship with your lender.

·   There’s no credit benefit – because it’s not an official loan, money borrowed from friends and family can’t contribute to your credit score, which is essential to get a mortgage or obtain a loan with favourable terms from your bank in the future.

·   You might lose money – unless you decide to take legal action, when you loan money to a friend or family member, it’s possible that you’ll never see that money again. You should come to terms with this reality before agreeing to a loan with a loved one.

The importance of setting expectations and defining a repayment plan

A lot is at stake when you borrow and lend money to friends and family. This makes it much more important to set your expectations before exchanging money.

Differing expectations are one of the greatest causes of conflict when you borrow and lend money, so it’s important to outline a clear repayment plan to protect your relationships.

How to create a payment plan between a family member or friend

1. Discuss and agree on the loan terms

The loan terms are the basics of what you need to know when you borrow and lend money from friends and family. This includes the total value of the loan, the interest rate – if there is one – and the total duration of the loan.

2. Determine the repayment frequency

Will the family member or friend asking for money repay you weekly, fortnightly, or monthly? Or will they pay the loan back in full on a given date? Deciding on the repayment timeline can help to quell the lender’s and borrower’s anxiety since they both understand when payments are due.

3. Decide on the payment amount

Now you know how often you – or your friend/family member – can expect to repay the loan, you should decide how much should be paid back on these dates. Make sure it’s an amount the borrower can afford to avoid awkwardness and possible conflict later down the line.

4. Agree on the payment method

Will you use direct bank transfers or pay in cash? Maybe it makes more sense to use a payment processing platform like PayPal or Venmo. You need to know this before you put your friends and family loan into action.

5. Agree on late payment penalties

Both the lender and borrower need to know how much it’ll cost if someone fails to pay on time – or you might agree that there won’t be a penalty at all. Either way, it’s a decision that needs to be made before any money changes hands.

6. Put everything in writing

At this point, you’ve made all the important decisions and can type them into an official loan agreement. This is vital as it gives you a loan record to which you can refer back if necessary.

7. Sign the agreement

Now, all that’s left to do is sign. This makes your loan agreement a binding contract which – if you struggle to get your money back from the borrower – means you’re legally able to get your money back.

Tips for managing expectations when borrowing or lending money

When you borrow and lend money to friends and family, differences in expectations can create confusion, resentment, and conflict.

This is why both the borrower and lender need to set their expectations about the loan before exchanging any money.

Here are five things you can do to manage expectations and avoid conflict.

Set clear boundaries

When you have a family member or friend asking for money, sometimes it’s difficult to say ‘no’. Whether this is to the loan itself, the size of the loan, or the proposed repayment schedule, it’s a good idea to let your loved ones know what you’re comfortable with early.

Don’t lend more than you can afford

If lending to your friends and family makes you anxious about your own finances, you probably shouldn’t do it. Not only is worrying about money unpleasant, but if your loved ones can’t pay you back on time, it can put a significant strain on your relationship.

Keep expectations low

When choosing to borrow and lend money to friends and family, holding them to the same standards as a bank is a mistake. To protect your relationships, it’s better to let a few late repayments slide – and give your friend/family member the benefit of the doubt – than to police them about payments.

Lend only to those you trust

It goes without saying, but you should only lend money to the friends and family members you trust to pay it back. Otherwise, you might have to deal with being worse off financially and losing someone close to you, if they fail to repay the loan.

Get it in writing

A written agreement helps resolve arguments about loan terms quickly since they’re recorded in black and white. It also ensures that – legally – the lender can get their money back if the loan isn’t being repaid. Likewise, for the borrower, this document stops the terms of the loan from being suddenly changed.

Strategies for resolving conflicts from borrowing and lending money

No matter how well we plan and outline our expectations, sometimes conflict arises no matter what. After all, money is a sensitive topic.

In these cases, knowing how to resolve conflict effectively is vital – using these four steps.

Communicate with the other person

Too often, conflicts happen because of poor communication. Misunderstandings go unresolved, resentment builds, and small problems can become enormous.

So, if you start to feel uncomfortable with the family member or friend asking for money – or if you’re struggling to pay back a friend and family loan – have a discussion. Tell them how you’re feeling, ask how they feel, and let them know that the point of the conversation is to find a solution that you’re both happy with.

Identify the root cause of the conflict

To effectively solve a conflict, you need to figure out why there’s conflict.

If there’s one thing people dislike discussing, it’s money. However, it’s essential to be direct if there’s a problem, since your relationships with your friends and family are at stake.

Whether a friend is uncomfortable because they aren’t being paid back as quickly as expected, or a family member feels pressured to repay the loan more quickly than they can afford, you need to find out the root cause of the conflict to bring about the change that will fix it.

Change the terms of repayment

The repayment schedule is the most common cause of conflict when you borrow and lend money as a friends and family loan, specifically when someone doesn’t – or can’t afford to – repay as quickly as agreed.

Changing the repayment terms allows the borrower to repay their loan over a longer period, making them less anxious and easing the strain on your relationship.

Find a third party to mediate

Unfortunately, conflict can escalate to the point that discussing the issue amongst yourselves is no longer productive.

This is when it can be a good idea to get a third party to mediate – someone you trust who isn’t biassed towards either of you. As a last resort (if things have gotten really out of hand), you can employ a lawyer or financial professional to help resolve the dispute.

Alternatives to borrowing money from friends and family

Often, choosing to borrow and lend money from your friends and family isn’t worth the strain it can put on your relationships. So, it might be worth looking at other ways to secure the funds you need to improve your financial situation.

Here are some alternatives to consider before going to a family member or friend asking for money.

Sell unwanted items

A quick, easy way to make some extra cash is to sell anything you own that you don’t need.

We all have things stored away – pushed to the back of our cupboards, closets, and even in forgotten boxes in the attic – that we don’t use.

Depending on how much you need, selling what you no longer want can raise enough to allow you to forgo the friends and family loan – and it’s easy, thanks to platforms like Facebook Marketplace, Ebay, Depop, and Vinted.

Take on a side hustle

One way to improve your financial situation is to boost your income. But that’s easier said than done, right?

Well, aside from asking your employer to give you a raise – which isn’t a bad idea either – consider taking up a side hustle.

Whether you choose to offer up the skills you use in your day job on a freelance basis, turn a hobby into a source of income, or start up a small side business, taking on a side hustle can increase your income and make a friends and family loan unnecessary.

Get free financial advice

Sometimes, there’s a way we can get out of a sticky financial situation that even we can’t see – that’s why it’s worth going to a professional.

Organisations like Money Helper or Citizens Advice offer free financial advice across a range of issues, including whether to borrow and lend money from friends and family. Based on your current financial situation, they can also outline the steps you can take to avoid doing so.

Gifted deposits

If you’re looking to buy a house, asking a friend or – more often – a family member for a gifted deposit can reduce the cost of your future mortgage without making your loved ones feel uncomfortable about loaning you money.

Credit union

You’ve probably already considered the bank route if you need to borrow money.

Another alternative is to borrow money from a credit union. These are non-profit financial institutions that offer loans, among a range of financial services, to their members. Often, these organisations offer lower loan rates, making borrowing money less expensive.

Use HyperJar to manage how you borrow and lend money, all from our clever app

Borrowing and lending money between family and friends comes with a lot of risks.

Then why do people borrow and lend money? Well, it can help yourself or a loved one escape financial difficulty – without incurring debt – and avoid the hassle of applying for a traditional loan.

When the benefits outweigh the risk, and you decide to give or receive a friend and family loan, navigating the process effectively is essential to protect these relationships.

Make sure that if you borrow money, pay it back on time – or ask to adjust the repayment plan if you can’t afford it. If you lend money, try to manage your expectations, and keep communication open to avoid making the people you care about feeling anxious about paying you back.

To manage your lending and borrowing, learn about your spending, and access discounts and rewards, check out HyperJar and download the app to improve your financial position and ensure you never make payments late.

Continue reading 

If you found this article interesting, you may want to continue reading with a few of these other money management blogs:

Amabel Polglase

Chief Marketing Officer

Amabel has diverse experience in business, marketing and entrepreneurship, including founding her own successful startup. She served in several senior leadership roles prior to joining HyperJar including Zilch and Curve Card where she led brand, marketing and communications. Before joining the fintech revolution, Amabel was a managing global client partner at Facebook and prior to that at McCann-Erickson, the world’s largest ad network. She volunteers at Girls Out Loud, a charity created to empower and inspire teenage girls, and is also a mentor at The Girls’ Network. She received her MA in history and international relations from the University of St Andrews.

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