Should you lend money to family and friends?

Should you lend money to family and friends?

If a family or friend is struggling with money, struggling in a financial emergency or is finding it difficult to get access to funds due to having bad credit, you may be asked if it is possible if you can lend them money. However, as we all know, the subject of money can quickly become a source of tension if the situation is not dealt with correctly, leading to ongoing feuds, that sometimes end up permanently damaging a relationship. Understandably, this can make you feel nervous about lending money to family and friends when you value the relationships you have with them. So should you borrow money from others close to you? Here at Payday Bad Credit, we explore the different things you should consider if you do, as well as the other options that can be considered if you decide not to. It is always imperative to remember that ultimately there is no right or wrong option. If you choose to not lend money to family and friends, it is your money, and therefore it is entirely your prerogative to do with it as you please. You should never feel pressured to give money if you do not feel comfortable in doing so, or if you are in financial difficulty yourself.  

Set clear boundaries

If you have made the decision to lend to a family member or friend, you should set clear boundaries from the very beginning. In many cases when it comes to lending to someone you know, the disagreements start to arise as a result of assumptions made. For example, the borrower could think that the money is a gift and doesn’t need to be paid back, or they have a considerable amount of time to pay the lender back, whilst the lender believes its simply a short-term loan. To avoid confusion, it is important to set clear boundaries:
  • Explain clearly the terms of the loan – and that you want to be paid back before giving the money
  • Talk through together about a feasible repayment plan
  • Talk through about a cut-off point in which you expect to be paid back in full

Consider the tax implications

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If you receive interest on an informal loan, you will need to let HM Revenue and Customs know as soon as possible.

You may not be aware that there can be tax implications even when it comes to informal lending. This will happen if you receive interest on an informal loan given to a family member or friend, meaning that it could end up becoming liable for taxation as income. If this is the case for you, then you will need to declare received interest through the HM Revenue & Customs Self Assessment form, putting it as a taxable form of income. However, remember this is only if the loan isn’t interest-free, otherwise, neither you nor the recipient will need to pay tax on it.

Try helping in other ways

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There are other ways you can help a friend or family member than providing them with a loan.

  Perhaps you are not comfortable with lending money to a family and friends, potentially as that person has shown themselves in the past to have a bad track record of not being able to pay back other people you know, or you know you will never see the light of day of that money again. It could also be because you simply can’t afford it. However, there are other ways you can help a family member or friend. For example, maybe you could help them with setting up a budget or offer to help look after their children whilst they look for additional work or let them stay at your house whilst they get back on their feet.

Alternative to lending to family and friends

There are other options family or friends have when it comes to getting a loan. Lending to someone you know can end up becoming a messy, complicated affair, so let’s take a look at some of the other options available.

Credit unions

A credit union is non-for-profit and tend to be a better option than turning to traditional lenders as interest rates are usually low, and typically there are no charges if you make early repayments.  They are also regulated by the Financial Conduct Authority, meaning that if the credit union was to go bust, you will be covered by the Financial Services Compensation Scheme. However, you will need to meet certain eligibility criteria in order to join one. To find out more about this, click here.

Payday loans

If a friend or family member is only temporarily struggling with their finances but has bad credit, a payday loan may be an option if they are looking for a loan to get back on their feet. An application is processed with immediate effect, and if it is approved they will also receive the money on the very same day.

Daniel is a loans expert based in London and has been working in the payday loans industry since 2010.