A guide to lending money to family and friends
If a close friend or family member is in financial difficulty, you may want to help them with a loan. But lending money to family and friends could have a lasting impact on your relationships, especially if things go wrong.
Here’s our guide to what to consider when lending money to, or borrowing from, family and friends.
If a close friend or family member is in financial difficulty, you may want to help them with a loan. But lending money to family and friends could have a lasting impact on your relationships, especially if things go wrong.
Here’s our guide to what to consider when lending money to, or borrowing from, family and friends.
Can I lend money to a family member?
Yes, you can lend money to a family member. It can be a quick, convenient and low-cost option that could help out a relative if they find themselves in financial difficulty.
According to the Financial Conduct Authority (FCA), 4.6 million Brits borrowed money from family or friends in 2022.
However, whether you should lend money to a family member is something to consider carefully.
What should I consider before lending to friends and family?
It can be hard to refuse someone you’re close to if they ask you for financial help. But before you agree, there are a few important considerations:
- Will it affect your relationship? If there are problems with paying back the loan, it could put a strain on your relationship.
- Can you afford it? Consider your own financial situation. If lending the money leaves you short, you could both end up in financial difficulty.
- Why do they need a loan? You’ve a right to know what they want to use the money for. It could be that lending them money may do them more harm than good.
- Will they pay you back? You need to be clear from the start if this is a loan or a gift that doesn’t need to be repaid.
- Should you make a formal written agreement? This should include the agreed terms, length of the loan and repayment structure, so you both know exactly where you stand from the start.
- Are there tax implications? If you charge interest, you may need to declare it to HMRC as taxable income.
Only consider lending money to friends or family if you’re completely happy with the arrangement. If you feel pressured into lending, then maybe you should re-consider. It’s a big ask, which could have lasting repercussions on both your finances and your relationship with that person.
How to ask to borrow money from family or friends
Depending on your relationship, asking someone close to lend you money could be extremely awkward. You may feel bad for putting them in a difficult position.
As the borrower, you’ll want to show the other person you can be trusted to pay back the loan.
The following steps could help you avoid any problems that could put a strain on your relationship.
1. Work out your budget
The golden rule of borrowing, whether from a bank or a family member, is to never borrow more than you need. It should only be an amount you can comfortably afford to pay back.
Our personal loan calculator could give you an idea of monthly repayments over a set period to help you work out a feasible budget. If you can present a clear repayment plan to your friend or relative, they may feel more reassured about lending you the money.
2. Consider who you’ll ask
If you ask to borrow money from friends or family, make sure it’s someone you really know and trust. Someone you only know on the surface could display a more unpleasant side when it comes to getting their money back.
If you do ask a close friend or relative, don’t pressure them into lending the money. Emotional blackmail is unfair and you may be putting them in a difficult position. They may have their reasons for rejecting your request and it’s not worth ruining a relationship if they say no.
3. Work out the terms and how you’ll repay them
You both need to be clear about the repayment terms and length of the loan. Is it a gift that doesn’t need to be paid back? Or is it a loan that needs repaying?
If it’s a loan, you both need to discuss what will happen if you miss a repayment or struggle to pay back the money. And consider what would happen if your friend or relative’s circumstances change. For example, if they were to lose their job, would they expect you to repay the loan early?
4. Put it in writing
Once you’re both happy with the terms, put your agreement in writing. It may seem like overkill if you know each other well, but it could help avoid any potential disputes further down the line. A written agreement will also ensure that both your interests are protected.
If you’re borrowing a relatively small amount of money, an informal written agreement, signed by both parties, may be enough.
For a larger sum, it may be best to draw up an official agreement with the help of a professional.
If you want to change any of the terms of the agreement, make sure you update the changes in writing. Don’t rely on a verbal agreement.
5. Keep a payment record
Make sure that you both have written receipts for each repayment. This will ensure there are no disputes over missed payments or the amount left to pay.
When should I consider borrowing money from family or friends?
Those close to you are likely to be far happier and willing to lend you money if they know it’s for a good reason.
Here are a few times when it might be a good idea to ask parents, close family or friends to help:
Paying bills
The rise in the cost of living means that many households are struggling to pay basic utility bills. While a loan from mum and dad may help tide you over, it’s important to address the long-term issue.
If you’re on a low income, you may be eligible for certain government benefits and financial support. And if you’re struggling with debt, MoneyHelper offers a free debt advice service.
Clearing debt
If you’ve built up large debts with high interest rates, a family loan could help clear what you owe. Even if they charge you interest, it may be a lot less than for a personal loan or credit card.
If you can manage to clear your original debts, take time to reconsider your financial situation. Make a budget for each month and ensure you pay what you owe on time. Consider a credit building credit card. Used responsibly, it could help improve your credit score and give you access to cheaper credit in the future.
Buying a house
If funds allow, many parents are happy to help their child buy their first home by lending them money for a deposit.
You’ll need to let your mortgage provider know that the money is a loan, not a gift. This could affect your mortgage application because the loan is essentially another debt to pay in addition to your mortgage. It might limit the number of mortgage deals available to you.
Funding a wedding
Gone are the days when the parents of the bride are expected to foot the bill for an entire wedding.
Today, many couples may prefer to pay for their big day themselves. But weddings are still a major expense, so a family loan could be an ideal solution for you and your partner.
Buying a car
A new car may be a necessity, especially if you need it for commuting to work. It might be worth asking family or close friends if they can help out with a loan. If not, there are a number of car finance options you might want to consider.
Paying your way through university
Even with government support in the form of Student Loans Company (SLC) student loans and a part-time job, many undergraduates still find they’re struggling for money.
A loan from family or friends could help with your living costs, a rental deposit or for bigger purchases that you couldn’t otherwise afford.
Pros and cons of borrowing from friends and family
Borrowing money from your loved ones isn’t something you should take lightly. Before you approach them, it’s important to weigh up the pros and cons of borrowing from friends or family.
Pros
- You won’t need a credit check, so your credit score won’t be impacted.
- It’s likely you’ll be charged very little interest, if any.
- Friends and family are likely to be more flexible and forgiving than personal loan providers if you’re late with your repayments.
- There’s no need to resort to high-risk, high-interest borrowing, such as payday loans.
Cons
- If things go wrong, it could damage your relationship with each other.
- Borrowing from family or friends won’t impact your credit history, so won’t help you build your credit score.
- You may be putting your friend or relative in a difficult financial position.
- Any loan, even a private family one, will impact your affordability when you apply for other credit, like a mortgage.
Should I borrow money from a partner?
Think carefully before asking a partner to lend you money. The dynamic instantly changes because you’re no longer just a couple. You’re also a debtor and a lender – which can bring extra pressures to your relationship.
If you’re relatively new to the relationship, your partner may view the request as a red flag and worry that they’ll be continually asked to bankroll you in the future.
Or they may feel obliged to lend you the money but end up putting themselves in financial difficulty – which won’t be good for either of you.
Even if you’re in a long-term relationship, there’s potential for resentment and inequality if one person becomes too reliant on the other for money.
A loan arrangement could also prolong a relationship that’s all-but over or make a break-up less than amicable.
If you do ask to borrow money from your partner, it’s essential to understand the potential implications from the outset.
What should I do if things go wrong?
Lending money to family or friends is risky. Are you willing to take a financial hit if things go wrong and they can’t pay you back?
If you’re not prepared to write off the loan as a gift, there are things you can do:
- Talk: see if you can come to an arrangement. Perhaps accept lower repayments over a longer period of time.
- Mediation: if talking doesn’t work, seeking impartial advice from a third party could help you come up with a solution that suits you both.
- Get legal help: as a last resort, you could seek legal advice. You might be eligible to make a claim online using the Money Claim Online (MCOL) service. It’s usually cheaper than trying to claim back your money through the County Court system.
No matter how close your relationship, it’s vital that you get a written agreement signed by both parties before parting with your money. It could help if you ever need to prove that the money was intended as a loan, not a gift.
Alternatives to borrowing money from friends and family
If borrowing from friends or family isn’t possible, or you don’t feel comfortable asking them, there are some alternatives to consider:
Guarantor loan
Rather than borrowing money directly from a friend or relative, you could ask them to be your guarantor for a guarantor loan.
This means that they guarantee to pay back the loan on your behalf if you’re unable to make the repayments. A guarantor loan can be risky for both parties, so it’s vital you each understand the responsibilities you’re taking on.
You can’t compare guarantor loans with Compare the Market.
Personal loan
Personal loans up to £25,000 are widely available, although low-interest loans are usually reserved for those with the best credit scores.
You can spread the cost of a personal loan over several months or even years. A longer term means lower monthly repayments, but you’ll pay more interest overall.
Secured loan
With a secured loan you’ll need to put up an asset, like your house or car, as collateral. This means that the lender could repossess your asset if you fail to keep up with the loan repayments.
Credit card
Some credit cards offer 0% interest on purchases for a set period. As long as you pay the minimum balance each month, you won’t be charged any interest.
Just be sure to clear the credit card debt in full before the introductory 0% period ends. If not, you could face hefty interest charges on the remaining balance.
Gifted deposit
Close family members may want to give you the money for a deposit to buy your first home.
They’ll need to specify in writing that it’s a gifted deposit, not a loan, and they don’t expect you to pay it back.
Peer-to-peer loan
Peer-to-peer loans (P2P) allow you to borrow directly from individuals without going through a bank or broker. P2P loans are available through dedicated online P2P platforms.
Eligibility, interest and terms will depend on your credit score, which needs to be good if you want the best rates.
Compare loans
With Compare the Market, you can see what loans you’re likely to be eligible for in just a few minutes. Our loan eligibility checker is a soft credit search, so it won’t affect your credit score in any way.
Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.
Frequently asked questions
What are the tax implications of lending money to family?
There may be tax implications if you charge interest on the loan. The interest earned forms part of your personal tax allowance, so you may need to declare it to HMRC.
There are no tax implications if the loan is interest-free.
Can you lend money to family tax-free?
If you don’t charge interest, then the money you lend to family or friends will be tax-free.
You can also gift up to £3,000 in a tax year to your children or grandchildren, tax-free.
How much money can I lend to a family member?
In theory, there’s no limit to the amount of money you can lend to a family member. Just be aware that the larger the sum, the longer it may take them to pay you back.
As a rule, only lend as much as you can afford. If your relative has trouble making the repayments, you could both end up in financial difficulty.
What happens to the loan if one of us dies?
If you receive a loan from a family member and they die, you’ll still need to repay the money you owe. If you’re a beneficiary of the deceased’s estate, you’ll receive your share of the estate, less the amount of the loan.
If you’ve loaned money to a family member and they die, the loan will be repaid to you from their estate. If there isn’t enough money in the estate to pay off the debt, it will likely be written off.
Surviving relatives of the deceased won’t be personally liable for paying the debt, unless they were a guarantor or co-signatory of the loan.
