We take a look at some of the problems surrounding lending to family and friends...
The last thing most of us want is our children, friends or family being beholden to some high interest-charging, aggressive financial institution that seems more interested in its profit margin than giving a fair deal on lending money.
If you’re in a position to lend a family member or friend some money at a time of need, most of us would be happy to do it.
We can all remember the costs involved in owning our first property, we can all remember not being prepared when the boiler blew up or when the car’s ‘big end’ went unexpectedly.
We turned to our family or friends and we got help, and we learned that in future it’s important to build up an emergency fund. It was a vital lesson, and we repaid the money we owed.
Now we’re in a position to lend money we’re happy to do it, but what happens if it all goes wrong?
Family and friend loans
Let’s take a look at the figures. The average debt reported by CCCS clients in 2010 was £22,476. Of this, £3,530 (nearly one pound in every six) was a private debt, owed to family and friends. And with the on-going credit crunch and general lack of high street lending, this figure could grow further.
This comes alongside the data that shows that lots of parents are releasing money to their children and family prior to their deaths. The baby boomer generation have seen the value of their property rise during the boom times but they’ve also seen their own children struggle to get on the housing ladder because of this and they want to help.
But these figures don’t reveal the fact that money is a strange emotional tool; if you’re willing to lend money to a friend or family member, you must mentally prepare yourself to write off all the money you lend, just in case.
Money is not worth ruining relationships with family or friends for; if you are the lender you need to take this on board straightaway.
Should you consider drawing up a contact with a repayment schedule? It may make things more official, but how would you enforce it in the event of non-payment? There are web tools like US-based LendFriend that can formalise the agreement, but does imply a lack of trust in paying it back?
Paying back family loans
Like anyone else, family and friends can suffer if their circumstances change and just like the high street banks you need to bear in mind that if the person you lend money to suffers a sudden income shock, they may never be able to repay the money they borrowed from you, despite their best intentions.
If they do pay you back, this is an added bonus, but don’t rely on it.
It’s natural to want to help those we love, but sometimes this can lead to trouble. We’ve come across cases where Mum and Dad have taken out loans from high street lenders in their names to assist children, and we’ve seen the consequences when children can’t or won’t repay the money – in some cases this has led to the parents having to go bankrupt or enter into IVAs.
Loan guarantors
Another way to help family and friends is by being a guarantor on a loan. We often add our names to a loan application for extra security for the lender and to help out a friend or family member.
But beware.
Only sign up to be a guarantor if you can afford to repay the loan you are guaranteeing. If, for whatever reason, the borrower cannot repay the loan, you will be expected to. Again we’ve seen this lead to bankruptcy and other forms of insolvency when the borrower cannot repay and the lender turns to the guarantor, using the full force of the law to recover the money owed.
Mixing love and money
We all want to help those we love, but mixing love and money can be a dangerous thing. You don’t want to destroy relationships over cash, or let relationships destroy your own financial situation. It’s like walking a knife edge.
We may have borrowed when we were younger and learned lessons from it and now that we’re seen as lenders, we’ve got new lessons to learn.
If you’re struggling because lending money to family and friends has left you short on savings and long on debt, you might want to try our online debt counselling tool Debt Remedy.
Even the chairman of the Bank of Mum and Dad might need some free and impartial advice from time to time.