Lending to Friends and Family
Neither a Borrower nor a Lender Be
This famous quote from Polonius in Shakespeare’s Hamlet is considered wise advice by many.
Unfortunately, the world rarely works that way, and many of us find ourselves in the position of needing a little helping hand from friends and family to get on in life. It’s nothing to be ashamed of, though care should be taken to treat anyone on both sides with respect; whether they are the lender or the borrower.
When someone has a poor credit rating, it can be difficult for them to get financial help from a bank or other institution, and eventually they may feel they have little choice but to knock on the door of friends and family. So, should you listen to Polonius, or cast that advice aside in the name of helping a loved one?
Can You Afford It?
As a general rule of thumb, if you feel forced into lending the money, it is probably a bad idea to do so. Shakespeare’s advice against lending money to friends and family is due to the difficulty of doing so without it leading to a rift if the borrower finds themselves unable (or sometimes, unwilling) to pay back the money - if there is any reticence whatsoever on the part of the lender, then this unwanted emotional situation is almost inevitable.
If you cannot afford to lose the money, or comfortably live without it while you wait for it to be paid back, then lending shouldn’t be an option.
Guaranteeing a Loan
While you may be unable to lend the money directly, perhaps you would consider being a guarantor for your friend. As a guarantor, a loan would be taken out in their name, but you would sign the contract too, making yourself liable for payments should they default.
A guaranteed loan like this can have a number of advantages for the person you are helping:
As it is in their name, it will help rebuild their damaged credit rating to pay it back regularly.
It gets them the money you cannot afford to lend them.
It may give them access to a slightly greater sum of money to help them out of whatever financial difficulty they are in.
It allows them to view the loan with a level of seriousness they might not do with a personal loan from you.
Under no circumstances should you consider taking out a personal loan purely in your name and passing on that money to your friend or family member. This could easily have the effect of putting you in financial straits yourself and will definitely put a strain on your relationship should anything happen.
Lending Out Your Savings
If you decide that lending your savings is the right way to go, here are some things to take into account to make the whole experience smooth and conflict-free.
Treat it like a business exchange
Despite them being a friend you trust, treat this one situation as if you are an emotionless business. You are providing a service (the loan) and you require some measure of return. It may not seem that way, but if you lend money without requiring interest on the repayment, you are out of pocket yourself as you lose any interest or investment opportunity you would have had.
Calculate a fair amount of interest that you are both happy with and set up a payment plan that is realistic and doesn’t put too much pressure on the borrower.
Make a contract
If the amount is relatively ‘small’ (£5000 or less), then there is usually no need to involve a solicitor. Draw up an agreement that you both agree on, making sure the pertinent points, such as a repayment schedule, are included.
For larger loans, we advise seeking legal advice before proceeding, no matter how much you trust the borrower.
Agree that the loan is outside of your personal relationship
The best success is achieved by those who agree that the loan is completely separate to their personal friendship. Agreeing that neither of you will bring up the loan, nor any aspect of it, during your general life together is imperative. It is important that the borrower does not feel that he or she has to explain any of their spending or other finances to you, and equally important that you do not feel angry if you see them spending money frivolously.
It may be beneficial to agree to never speak of the loan outside of a certain time (for example, between 9 and 10am on a Monday morning), so that you both know your friendship is not impinged upon at any other time. Or you could agree to communicate only via email regarding the loan.
Failing to make a separation may lead to the loan becoming a poison that spreads like sickness through your relationship.
Immediately write it off mentally
As soon as the deal is done and you have transferred the money, write it off in your mind.
Though you have set up a contract, and a schedule of repayments, dwelling on the money and expecting it back is going to cause conflict between you and your friend or family member. By having the mental discipline to say that it is gone, and you do not expect it back, there is far less chance of conflict from your side.
Do not let the borrower know that you no longer expect the money back - you’ve already determined you can financially afford to do so, so it should be simple. Then, when payments arrive in your bank account each month, you can feel proud and positive towards your friend - rather than negative when, inevitably, they don’t.
Remember – no amount of money ever replaces a friend or family member.