Borrowing from Friends and Family
Borrowing money from friends and family is a common practice, which saw an increase during the pandemic. A third of people are owed at least £500 from friends and family (Starling Bank 2023), with 46% of those owed feeling too awkward or embarrassed to ask for their money back. Unpaid debts cause breakdowns in relationships and mental stress. Low-income earners are more likely to be owed money than high-income earners, with 33% of those owed money earning less than £20,000 a year. 11% of those in debt to others are high earners (70K+ per year).
There is a significant difference in how individuals emotionally connect to money and the urgency they feel regarding informal debts. Those most in need often bear the most burden, while simultaneously trying to avoid adding to others' burdens. This demonstrates that repayment issues are not solely due to unaffordability and highlights the unfair risk placed on individuals without any benefit.
Budgeting apps and banking features aim to reduce barriers for settling debts with family and friends. However, despite these tools, the responsibility still lies with the lender and borrower. Informal IOUs, unlike those from financial institutions, carry little weight in motivating repayment.
People-pleasing and avoidance behaviours, often driven by guilt and fear of judgement, can prevent individuals from requesting repayment of informal debts. Childhood money experiences also shape adult attitudes towards lending and borrowing.
Mitigating Issues
To mitigate these issues, it is advisable to formalise loan agreements and treat loans to friends as high-risk, lending only what one can afford to lose. Addressing IOUs promptly, formalising loans with written agreements, and ensuring personal financial stability before lending are crucial practices. Clear communication and formal agreements are essential to navigate the complexities of lending money to friends, helping to preserve relationships.
Managing the Relationship
Borrowing from friends and family is often driven by motivation to repay personal loans. Successful repayments, like a parent paying off payday loans or a sibling helping with a tenancy deposit, often go unnoticed. Borrowing from friends or family typically involves no credit checks and minimal interest, making it more accessible and cheaper than commercial loans. Informal borrowing can lead to complications. Personal dynamics may shift, and debts can strain relationships.
Read our blog post on Struggling with Debt.
Formal Agreements
Document loan details, including interest and repayment plans, to prevent misunderstandings and preserve relationships.
Offer Debt Advice Instead of Lending Money
If you are committed to providing financial aid to a friend or family member, consider aiding them as a gift instead of as a loan to reduce tension. Encourage them to seek debt advice as a more beneficial option. Although it’s kind to help out, it can enable people to avoid managing their financial situation.
Legal Considerations
If repayment issues arise, legal options are available but can be costly and require proof of the loan agreement. Check the website of your governing body for region-specific legal advice.
Avoid Covering the Bill
It’s common to cover the bill out of convenience or to secure a time-sensitive deal, but dissociation with the purchase can prevent people from factoring in these group expenses with their budget – and maybe cause them to overspend to the point they cannot afford, or feel no obligation, to repay you by the time you request their share of the bill. Asking for the money upfront, or using a shared card at the point of purchase helps them to take responsibility for their financial management and track their budget.
Conclusion
Borrowing from friends and family can be a helpful financial strategy, but it requires clear communication and mutual understanding to maintain healthy relationships.