Should you lend money to family or friends?

Falling out with friends over money

Can you lend me £50 until the New Year?

It's a phrase we're all very familiar with - whether we're prone to asking friends and family to tide us over in the tricky last week of December - or whether we're used to hearing it from our loved ones. The question is what you should do. Is borrowing and lending among friends and family a good idea?

See also: Families facing 'nasty hangover of debt' after Christmas splurge

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See also: How to stop money worries ruining Christmas

It's certainly incredibly common. A study by (which is developing an app to help people lend to friends and family) found that 74% of us have lent someone money in the past 12 months. And while some of it is £20 or £50 here and there, half of us have lent up to £500 and almost one in 20 have lent over £5,000. As a result, the social lending industry is worth an estimated £2.9 billion.

We lend for all sorts of reasons. One in five feel they have to lend when it's a relative that asks, while almost a quarter feel they ought to, and another quarter lend because their friend or family member is desperate for the cash.

However, the same study found that almost a quarter of people have fallen out with someone over a loan, so it's worth thinking hard before lending anyone money. There are seven questions you need to ask yourself

1. Can you afford to lend the money?
You need to think whether you can live without the cash until you are paid back. You also have to consider whether you are happy to lose the interest the money would otherwise be earning for your elsewhere.

2. Will you cope if the due date shifts?
If you are not paid back on time, will you find yourself strapped for cash?

3. Can you manage if the money never comes back?
For those lending large sums of money this is a very serious consideration. Can your finances handle a total loss if everything goes wrong?

4. Would you chase it?
If you can't handle a loss, and the other person could afford to pay you back if they wanted, you need to know whether you would be prepared to take steps to get the money back - such as taking your friend or relative to the small claims court.

5. Can you handle the change in your relationship?
A loan may initially make you feel closer, but even if it is repaid in full and on time it will have changed the nature of your relationship. It can easily introduce awkwardness and discord.

6. Can your relationship survive if the loan goes wrong?
If the loan is repaid late, or not at all, you need to think what it will do to your relationship.

7. Can you say no?
Saying 'no' will affect your relationship too, especially if the other person thinks you can afford it. One option is to try to think of other ways in which you can help. So, for example, if they need the cash to get their car mended before payday, could you lend them your car, or give them a lift? If they need the cash to finish buying presents, could you tell them not to bother buying for you and yours? If they need the cash for Christmas food, you can always invite them round to eat with you.

Money isn't always the only way to solve a problem, and an alternative solution may be better for your relationship in the long run.

But what do you think? Do you borrow from family, or lend to them and is there anything wrong with it? Let us know in the comments.

Most common causes of debt
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Most common causes of debt

There are some very common reasons for building up problem debts. Here we reveal seven of the most common, and what you can do if you face them.

Unemployment or illness that means one or more of the household’s earners are unable to work will bring a profound change in family finances, and according to the Money Advice Service is the most common reason for getting into problem debt.

If your circumstances change, therefore, you need to immediately address your family finances, and put everything on a minimum spend lockdown. You should also look into the benefits and tax credits that are available sooner rather than later, to try to close the gap.

If you are on the kind of contract that means varying hours, it can be incredibly difficult to work out what you can afford to spend - making it the second most common reason for getting into debt - according to the Debt Support Trust.

Rather than swinging through the extremes from week to week, the best approach is to establish a budget that will work in the leanest of months, so you don't find yourself getting used to the months when you work more hours.

According to Citizens Advice, trying to service too much debt is the third most common reason for getting into difficulties. The TUC found that those with problem debts spend 40% of their income on debt repayments.

If you are in this position, you officially need some help with your debt problems. If you continue to rob Peter to pay Paul, you will end up owing more and more, so you need to take stock and talk to a debt charity about all your options.

The double-whammy of the legal bills combined with the incredible cost of establishing two separate households is enough to make divorce or separation the fourth most common reason for going into debt - according to the Debt Support Trust.

There's no easy solution, but if you are going through this, it can be helpful to talk through your financial situation with someone you trust or a debt charity, who can help you balance a stretched budget.

Problem debts aren’t necessarily caused by a sudden shock to the system. According to the Money Advice Service, 20% of their clients are simply trying to live on an unsustainably low income.

If you are in this category, it’s important to seek help on the benefits and tax credits you may be able to receive. It’s not always easy to navigate the system, but charities like StepChange have experts on the benefits system who can talk you through what’s available.

The combination of rising costs and stagnating wages over the last few years has meant increasingly people saw their monthly wage cover less and less of their monthly outgoings. This position has started to ease more recently, but has left many people far worse off than before the financial crisis. The Money Advice Trust said a combination of this and unexpected costs was responsible for almost one in ten problem debts.

If you consistently spend more than you are expecting, it's well worth keeping a spending diary. That way you can establish the real cost of living, and start to identify where you can cut costs.

The Money Advice Service says it commonly deals with individuals who have struggled to get to grips with budgeting and debts, and have got into debt because they don’t have the skills and knowledge to manage their money effectively.


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