7 Key Rules to Follow When Lending Money to Family or Friends

We all require a little boost of income every now and again, and getting your hands on some quick cash is not always easy. For those who may struggle to borrow money via more traditional means like personal loans and credit cards, borrowing from a friend or family member can take the pressure off but it does come with its challenges.

Money can be a tricky subject, and it’s not always easy to talk about it – even with your closest allies. If a friend or relative comes to you and asks to borrow some money, what would you do? It can be a real test for your relationship, and it’s always better to be prepared. Here are our essential tips for lending money to loved ones, whether they’ve asked you for a small amount or for something more substantial.

Think about it carefully

If you are asked to lend money to someone, it can be easy to feel pressured and to want to help – especially if you are very close to the person in question. Before you say yes however, it’s important to think about it for a while first. Consider whether you are financially able to lend the money above all else – if it will make things difficult for you then it will only create further hassle and costs down the line. You must also consider the possibility of not getting part or all of your money back – how will that affect your finances and your relationship with the borrower? If you have any doubts, you can always say you are not in a position to lend to them, and perhaps offer support in other ways.

Agree on terms and stick to them

If you’re happy to lend money, make sure the terms of the loan are completely clear and fully understood by both of you. Ensure the amount is agreed upon, as well as a timeframe for paying back the money. It’s important to be practical, and to take their ability to pay into consideration: there’s no point asking for all of the money back in a short space of time if the borrower won’t be paid enough by then, for example. Don’t be afraid to ask questions about their finances and what they can manage, as this will help to focus your expectations.

Always stick with cash or bank transfer

The next thing to consider is how to get the money to them. There are a number of ways you can do this, but giving cash or paying via bank transfer are the most sensible. Never give away your credit card to be used by someone else, as not only is this illegal in practice, it also risks your credit rating, and it could land you with expensive charges and repayments.

Depending on the amount, you should be able to make a bank transfer using your online banking facility, or alternatively you can withdraw the cash and either pay it straight into the recipient’s account, or give it to them in person.

Be prepared for hiccups

Always be aware issues can arise during the loan term, and it’s important to be prepared and have a contingency plan. Do not rely on the money being repaid for your essential expenses, as a failure to pay could land you in financial hot water. What happens if the person you lent money to loses their job, or their car breaks down during the repayment term? Discuss the possibility of problems with them and lay down ground rules so it doesn’t negatively affect your friendship. It’s easy for relationships to break down over money, and the preservation of what you have is an essential consideration.

Always put it in writing

To ensure all details are clear and understood, you should always put the loan in writing and make sure each of you has a copy. Both of you should sign the paper. You can find blank loan agreements on websites such as Law Depot, which could offer you some legal protection in the future in the case of non-payment. This step can also give you peace of mind the borrower fully understands the terms, and serves as a reminder to both of you this is something to be taken seriously and not done in haste.

Consider alternative ways to help

If you feel uneasy about lending money to your friend, or if you are financially unable to help them, there are other ways you can offer support. Why does your loved one need to borrow from friends and family? Perhaps it’s because they would be turned down for a more conventional loan on their own merits – their credit score may be bad, for example. In this case, there are other avenues to try.

If they have any valuables they’re willing to part with for a short time, a pawn loan could be the right solution for them. With a pawn loan, your credit rating is not checked as part of the application process, as the security for the loan rests within the value of the item used. If this sounds like it could be helpful, direct them to us here at H&T for more information. Alternatively, they can drop in and see us at any of our 250+ UK branches.

Don’t let it take over your life

While the loan is still being paid back, try to act as you usually would around your friend, and never ask them about it in front of others. While it can be easy to scrutinise their spending over this time, try to remain relaxed and trust the agreed terms will be met. If you have communicated your expectations properly, and you’re confident they are able to pay you back within the timeframe, then there’s no need to let it affect your day-to-day interactions.

Arrange as part of the deal to meet up every so often to have a private chat about how it’s going, and their ability to pay the next installment. Keeping the lines of communication open and being upbeat can really lessen the chances of issues forming, and will preserve your relationship for many years to come.