Borrowing money from friends and family

Whether clearing debt, buying a house, paying for a wedding or buying a car, there may come a time when you need to borrow from or lend money to a friend or family member. Whilst it may seem like a simple transaction, it can potentially strain your relationship if payments are missed.

In this guide, we’ll look at the advantages and disadvantages of borrowing from family and friends, what to consider, and what to do if things go wrong.

What to consider when lending to, or borrowing from, friends and family

Before lending to, or borrowing from, family or friends it’s important to consider the following:

• How it could impact your relationship: Being financially linked can affect even the best relationships. Make sure you’re both comfortable with it before you agree to anything.
• If it’s better to borrow the money from elsewhere: It might seem like the easiest and cheapest option, but it isn’t the only choice. A personal loan might be better suited to the situation.
• How the payments will be structured: This needs to be done in a way that’s affordable for the person borrowing the money, but also ensures that the lender gets their money back in a reasonable timeframe.
• Whether or not to charge interest: It may feel unfair to charge interest for a loan between family or friends, but without it the lender will lose out. You may decide to include interest at a low rate that everyone is happy with.

Pros and cons of borrowing or lending to family and friends

There are both advantages and disadvantages of borrowing money from friends and family. They are:

Advantages

• You will likely be able to borrow at a much lower interest rate, or with no interest rate at all
• There won’t be any fees or late payment charges
• There’s no need for a credit check to get the loan in the first place

Disadvantages

• If you struggle to make the repayments it could damage your relationship
• The friend or family member may not want to say no, but lending you the money could impact their finances too
• You could potentially breach the terms of other borrowing, like your mortgage, because any loan affects your affordability

How to borrow from friends and family

When borrowing from friends and family, there are certain things you should do to avoid any potential problems in the future. It’s essential if you’re borrowing a large sum of money and still important if it’s a smaller amount.

Work out your budget

Before asking for a specific sum of money from a friend or loved one, calculate exactly how much you want to borrow. You’ll need to work out what you can realistically afford to pay back each month without getting into difficulties. If you approach your loved one with concrete numbers and how it could work on a monthly basis it makes it easier for them to decide on the loan.

Work out terms and a repayment plan

Before any cash changes hands, map out the terms of the agreement and the payment plan. It needs to be clear from the outset whether this is a loan that needs to be paid back or a gift that doesn’t. Detail if any interest has to be paid and what happens if you miss any payments.

Should I write up a formal agreement?

It might not seem necessary to write up a formal agreement when you’re lending money between friends or family, but it’s important to do so. It gives the lender extra peace of mind and may help them feel more comfortable with lending the money. It also means that if anything happens in the future, you’re both clear on what was agreed. It doesn’t leave anything up to interpretation and could prevent disagreements that could ultimately harm the relationship.

Make sure you’re both clear on:

• The size of the loan
• Any interest
• The repayment schedule
• What happens if you miss one or more payments

Do I need to pay tax on money borrowed from friends and family?

If you decide to apply interest to the loan – even if it’s low – it places tax implications on both the borrower and lender. When it comes to the lender, they must declare any interest received as taxable income. For the borrower, if it’s a business loan, they may deduct loan interest from the business’ taxable profit.

There are no tax implications for either the lender or the borrower if the loan is interest free.

What to do if things go wrong

Sometimes things can go wrong and you may face more financial problems that mean you can’t afford to pay back the loan in line with the agreement. Or you may miss payments. It’s important to be open and discuss this between yourselves rather than ignoring it.

For the borrower

Don’t ignore it and think it will go away. The best thing to do is to talk to your friend or family member and be honest about your financial situation. Explain the money you have coming in and what your bills are. Maybe even share a copy of your household budget to help explain it to them.

They may give you some time to sort things out or let you spread some payments out to help make things easier.

If you ignore it, it’s not clear to the borrower what’s going on. They may think you have no intention of paying the money back which can negatively impact your relationship.

For the lender

If you’ve lent some money to a friend or family member and they’re struggling to pay it back, consider:

• Giving them a gentle reminder: If that person is having money difficulties, they may feel overwhelmed and anxious. Often, a gentle rather than forceful nudge is the best way to approach the situation.
• Suggesting a payment plan: They may be able to pay back some of the original monthly repayments. Sit down with them and see what they can reasonably afford. You may need to amend the original loan agreement to make sure you’re both clear on the new plan of action.
• Looking for ways to help them with their budget: Simple things like switching utilities and phone providers may help them save money each month.

It’s important to keep your cool and not lose your temper when discussing it with them. Also, don’t:

• Use threatening language
• Tell other people about the debt
• Add extra interest onto the debt

Alternative options

Personal loans: A personal loan will help you get the money you need and keep your financial independence without having to turn to friends or family. You will need to pay interest and it’s crucial for your credit score that you don’t miss any monthly repayments. Our helpful personal loan calculator will help you understand what you could borrow and your potential monthly repayments.

Guarantor loans: If you have a poor credit rating, you may be offered a guarantor loan. With this option, a friend or family member guarantees that they will step in if you can’t make your monthly repayments. It’s a way of them helping you without lending the money themselves.

Saving up: Yes, it may take a longer time and you won’t get the money upfront but saving up each month means you won’t go into any debt at all. And there’s no chance of putting any potential strain on your close relationships.

Credit card: If you want to borrow a smaller sum of money, a credit card may be a better option. If you pay it back in full each month, you won’t pay any interest.

How Asda can help

Not only do we work with a panel of trusted UK lenders to help you find the right personal loan for your needs. But we also offer free, impartial advice and support on all things money through our Financial Support.

Whether you need help understanding terms with our jargon buster or you want to check your financial health, we’re here to help.