Should you borrow money from friends and family?

When you need money, the first thing that may come into your mind is to ask your friends or relatives. However, you must weigh carefully about whether you can manage to return it and can deal with what might follow if you cannot.

Pros and cons of loaning from family and friends

Asking your family may be the easiest way to borrow money. They can give emergency cash and help you dodge borrowing with extremely high-interest rates, such as doorstep lending, bank loans, and payday loans.

If both parties are confident it will not destroy a relationship with a family member if you cannot pay back, this is the best choice as it is usually free of interest.

If you are borrowing from a friend, be conscious that if you do not return the money, this could end your relationship with your friend.

Work out a budget ahead

If you want to ask a family member or a friend, make sure you have drafted up a budget to see how much cash you have left after clearing your living expenses.

Look at your current-account and credit-card records from the last three months, and think carefully how much you can borrow.

What if you cannot repay?

It can be stressful if you cannot manage repayments, but it can be even worse if you are leaving a someone out of budget as it might endanger your relationship.

That is why it is necessary to form out your budget and create a new payment plan as soon as you see yourself in distress.

The first thing you may need to do is to let them know what’s happening to show them that you are an honest person and that paying them is your primary concern.

Things consider before lending money to friends or family

If someone asks for financial help, especially if it is a family member or a friend, it can be difficult to decline.

However, there is no point going into hardship yourself because you want to help, or because you feel sorry for not helping. On the other hand, maybe you cannot afford to sacrifice your relationship with them just because of money.

Can you afford it?

Work out your budget before lending to anyone. Consider everything you lend as gone. Be sure that even if someone cannot repay you, you would still be able to pay all your living expenses comfortably without borrowing from anyone.

Can they afford it?

Encourage the would-be borrower to draft out their budget, just like what you would be doing. Remember that if they cannot repay you, this may cause financial trouble for yourself or worse, your relationship with them

What will you do if the borrower cannot pay?

You might be certain the person you have lent funds to will be capable of paying it back in full, but you must study what you will do if they cannot; this is a very personal decision, so take your time and think about this.

How formal should it be?

Always keep in mind that whatever you or the would-be borrower says can be denied. Get something in writing when you are lending to family members. Do not be embarrassed by this as this is very common.

Know that if you lend money to family and friends on a regular basis, you might need to be documented by the Financial Conduct Authority (FCA).

In case the borrower died with an outstanding debt, having a formal contract can protect you. Contracts can be used as a proof to claim from their estate.