Will lending to friends or family wreck your relationship?

In post-pandemic times, financial needs might be greater. It's worth remembering that money could change a relationship. And lending money to people you know might have the most extreme effect of all.

That’s because it’s personal, and the rules that would affect whether you lend or not tend not to apply. Normally, you might only agree on a loan if:

1. you can afford it,
2. the borrower is in a position to be able to pay you back, and
3. they would be happy to sign a loan agreement

But you're far more likely to waive some or all of these considerations for people you know – after all, chances are you love (or at least like) this person, and you'll probably want to help them. But here’s the thing: by doing so, you risk falling out with them. Can you really afford to lose a friend, a partner or even a relationship with a family member?

If anything, you might want to be stricter with lending rules when it comes to the people who are important to you. You could start by drawing up a budget, which will show you if you can afford to lend the requested amount (and make it easier to say no). You might encourage the borrower to do their own budget, which will show if they'll actually be able to pay you back. Moneyhelper.org.uk (Opens in new window) has a budget planner you can use. You could also refer them to Citizens Advice (Opens in new window) for help with managing their debt.

If you decide to go ahead and lend to friends or family, be super-organised. Think about whether you want to be paid back in regular instalments or a lump sum. Will you be expecting interest on the loan? (If so, you'll likely need to declare this for tax purposes). How might you feel if they miss repayment deadlines?

Sometimes, it’s simple

One couple took their post-grad university student son aside and explained to him that his regular appeals for money had to stop, as they were both retired and could not afford to be constantly bailing him out after one mishap or another. "He never asked us again," said his mother. "He genuinely had not realised that it was hard for us to help him."

... or it’s worse than you expected

One woman learned the hard way about lending to friends. "Two decades ago, I lent a friend £1,000, as he wasn’t going to make rent that month, and I had exactly that amount in my savings account. I fully expected him to pay it straight back, as he promised to do so when his salary came in, but he didn’t, and I soon needed the money myself, as I then separated from my husband.

"Would I do it again? No. He soon left the country and claimed it was hard to send the money from his new abode (not true). A decade later, he gave me back a small amount, shortly after I told him over a meal that it was bad karma never to settle his debts! Another decade has gone by, and I’m still waiting for the rest. I discovered he still owes a mutual friend a similar amount. She too had needed the money back quickly as she had a tax bill due, so his non-repayment left her having to borrow money herself to pay HMRC.

"My advice is, don’t lend money to friends. The only caveat is if you would genuinely not miss it if it was never paid back. In fact, if that is the case, I would suggest a gift over a loan. I think that expecting the money back is nothing short of naïve, as I was certainly naïve in expecting this man to repay me. He ended up resenting me for wanting the money back."

Lending is bound to affect a relationship

"It can’t help but affect a relationship. People often resent you for lending them money. Sad but true. If you lend them money, they may convince themselves that you don’t need it and are in fact being selfish for insisting on its repayment. Needless to say, I no longer regard him as a friend.

"I would say that the same is true for adult children. By lending them money, you are not helping them to manage their money. If there is something they can’t afford, they should try and save up for it. One exception is true emergencies or helping them to buy property. But here, too, I would suggest a gift over a loan. Think of it as an early inheritance."

You can generally give away up to £3,000 worth of 'gifts' each tax year, called an ‘annual exemption’. (More information can be found at www.gov.uk (Opens in new window))

What else?

Other considerations might include whether the borrower would be prepared to offer something as collateral against the loan – and how you would feel if they bought something frivolous after receiving the money.

Will lending the money make social or family gatherings awkward? If so, agree some ground rules about privacy. And be clear about your own financial position. Will lending this money stop you doing something you’ve been putting off, such as improving your own pension fund? If the loan is to one of your adult children, consider if it will stop them learning to manage their finances on their own. By lending them money, you might be rewarding bad financial habits.

Lending to friends can work

However, lending to friends can work; a man we spoke to was luckier. A friend who was a former colleague was launching a new business and was very short of income, while her fiancé, in the midst of a stormy divorce, had his accounts frozen. He lent her £3,000 to tide her over, and she paid him back a year later, when income from her business had begun to rise, and her fiancé’s divorce settlement was in place.

‘Mentally, I wrote the money off, as I had no idea whether she was going to be able to repay me, and it sounded like her money troubles were going to be lengthy,’ he said. ‘But she had been a good friend, and over the years had sent several clients my way, so I thought that even if I didn’t get it back, it would be OK.’

The post-pandemic years may see many people struggling to get their income back to normal. No one wants friends or family to resort to payday lenders, but if you decide to lend, think about the points we've outlined and hopefully you'll be off to a good start.

Disclaimer: This article is for information only and does not constitute financial advice