Mates and money: how not to fall out
When you're in pickle a loan from a friend or family member can be an invaluable lifeline, but what should you consider before treading these tricky waters?
Finance and relationships can be a thorny issue because we all have different opinions on money management. Yet while we've all heard stories of people falling out over loans that don't get repaid, there's likely just as many, if not more, cases when friends and family help each other out with a loan and remain on good terms. So what are the dos and don't of borrowing money with loved ones?
As the borrower
- If you need financial help, it is worth talking to your friends and family about your situation prior to springing a request for a loan on them. If you plan to ask rather than wait to be offered, consider their financial situation and whether their cash flow position will allows it.
- If your friend and family can't or won't lend you money, try not to take offence. They may have their own reasons and if you have a bad track record with money, it's perfectly reasonable that they are worried about never seeing their cash again.
- If you both agree to a loan, put a formal agreement in place with repayment terms and dates. If you are struggling to meet a repayment, try to give advance warning and let them know as soon as possible.
- Remember that the money you borrowed may have an impact on them as well, and missing a repayment could have a knock-on effect on their finances. Work out together how you can honour the agreement, such as extending the loan term and making smaller repayments.
- When you have an outstanding loan with friends or family, consider how your behaviour is perceived. It may not go down well if you're splashing the cash on treats and new clothes when you owe them money, which could damage the relationship. Ultimately, if you borrow and fail to pay back, you risk losing their friendship and support.
As the lender
- Before offering a loan, try to identify exactly why they are in financial difficulty. If they are unable to secure bank loan, or temporarily use a credit card or overdraft – the chances are that they may have bad credit history that doesn't bode well for any money you lend being repaid.
- If you are asked for a loan, you have every right to know what it is for. The decision to give it is likely to be influenced by the purpose after all, as offering money for a holiday they have not bothered to save for is very different to helping them meet pressing household bills following redundancy.
- Some share the opinion that should you only lend to friends or family what you can afford not to get back. While this may be the case with some relationships, it should be made clear from the outset whether the money is a loan or a gift. In either situation, it is important to never feel forced into offering money and to not put your own financial situation at risk by lending more than you can afford.
- If you decide to give a loan, it is crucial to draw up an agreement of when and how it will be repaid. It may seem unnecessarily formal, but it means both parties know exactly where they stand and you have something to refer to if the borrower has trouble repaying. Discuss whether interest will be charged, and how the loan will be repaid – add hoc payments or through a regular direct debit for example.