Want to help a friend or family member get out of financial trouble? Do it the right way so you can avoid the stress and make sure your relationship doesn't turn sour.
Friends and family members lend money to each other everyday. The FCA estimated that almost 6 million people borrowed from friends and family during the covid pandemic alone.
Why? Because helping someone you care about feels great. And in the UK today, millions of people find it hard to access affordable credit.
Lending money to our friends and family isn't always simple though. 50% of people regret their decisions when lending and borrowing with people they know. This all comes down to miscommunication and the complication of relationships. You can eliminate this by learning how to lend money the right way.
You have the power to make someone's life that much better. We want to help you make this possible. Read through this guide to avoid any complications, awkward money conversations and keep your relationships intact.
First things first. Can you afford it?
Before you start lending your money. Think about what would happen if you weren’t repaid, or if any unexpected expenses came into your life while you were without the money you're going to lend.
Always make sure that you have an emergency fund as a buffer. If you can't afford to be without the money, then you shouldn't be lending it out to begin with.
Can the borrower afford it?
A borrower shouldn’t ask for a loan that they cannot afford to repay. But sometimes this happens. Always kick things off with an open conversation to understand how the borrower will make the repayments. Do they have a steady income? What are their upcoming expenses?
If the borrower has a clear plan to repay your loan, this should reduce the risk of things taking a wrong turn.
Repayment Terms that work for you
If a friend or family member is asking you for a loan, it’s likely they have either been rejected from another source or have been offered unfavourable terms.
Of course, we want to give the people we care about favourable and flexible terms. But it’s essential to also stick to a timeline that works for you. For example, if you need the money back by a certain time, or cannot afford to lend the full amount they’re asking for.
Do you know and trust them?
You should always be cautious when lending your money, even to your friends & family.
How well do you know the borrower? Can you trust them? These are two questions you should ask yourself.
You should always create a written loan agreement when lending your money. This ensures the terms of the loan are crystal clear for both parties, protecting the lender if they’re not repaid.
It also serves as proof of tax compliance. You can show HMRC proof the money was given as a loan and not a gift.
Read everything you need to know about loan agreements in the article below.
Online scams exist all over the interest. Scam artists will do their best to trick people into giving them information or money. This is something to watch out for when anyone asks you for money across a text message, email or social media platform.
Always try to meet up with a friend or family member if they would like to borrow some money, or at the very least use a video conferring tool like Zoom or FaceTime so you can verify someone's identity.
It’s a common misconception that because friend and family loans are a personal arrangement, there won’t be any tax implications. If you’re charging interest on a loan you may need to inform HMRC.
Read our full article on this below👇
Charging interest on a friend and family loan is perfectly acceptable. And how much you charge is up to you.
Mainstream lenders charge anywhere from 3% to 292% per anum. Friend and family loans are there to offer an affordable and fair option. We would recommend charging up to 10%. This keeps the agreement fair and gives the borrower the chance to repay. It also ensures the agreement doesn’t become invalid for unreasonable terms.
If you’re lending your money out, you may want to keep its value in line with the current inflation rate. You could set the interest rate to match the current inflation.
Think of it this way, if you’re going to be missing out on investment returns or lending a large amount of money, charging interest is fair. Or you may want to keep the value of your cash in line with the current inflation rate so you could set the interest charged to the inflation at the current time.
If the loan is for a smaller amount of cash or over a short period you may want to waive off any interest on the loan.
Sometimes, even if you take all the correct steps when lending money to someone you know, the other person may not live up to their end of the agreement.
When someone doesn’t pay you back their loan back, this is where the relationship can complicate.
The article below contains all the steps you need to take when you're not repaid.
Parting with your hard earned cash can always be a daunting task to do, even if it's with people you trust and care about. By having open conversations, being aware of the risks and using a written loan agreement you should cut down the risks and make the loan run smoothly. So you can help the people you love without the stress.
Using a contract builder or a tool like Punk Money is a great place to start. Saving you time and hassle.
Disclaimer: This guide must be used for informational purposes only. You should take independent financial advice from a professional in connection with, or independently research and verity any information you find in this guide.