If you’re looking to borrow money from family or friends, it’s important you consider your options carefully. And if you owe debt to family and friends that you can’t repay, you’ll know why. Debt with friends or family is different to owing a bank or other formal creditor, but there are still potential legal repercussions, and you don’t want to damage a relationship as well.
What is family and friends debt?
This is any debt that you owe to a member of your family or one of your friends.
For a lot of people, borrowing money from relatives or friends can make sense. After all, you can set up as flexible a repayment schedule as you’re both willing to agree to, there are no complicated forms to fill out, and there isn’t any interest to pay. If you’re struggling to get by, but you know someone who is financially secure and doesn’t mind lending you the money, it can be a much better way of helping to deal with your financial difficulties since you aren’t adding to your amount owed with interest every month.
But it’s not a perfect solution. Often family members or friends may not have large sums of money available, so if you’re looking for a significant loan it might not be an option you can consider. And if you fall behind on repayments you can do damage to your relationship. While a formal creditor might be faster to threaten legal action, if it’s only a temporary solution then at least you’re only disappointing a faceless corporation – but let down someone you know and it can be a much more emotional situation.
With that in mind, it’s usually best to never just accept a cash lump sum from someone without going into detail on your personal circumstances. Many people will instead create a budget sheet, then share it with their family or friend creditor. This will show what their current circumstances are, and why they need to borrow the money. If you decide to do this, set out the time that you will make payments. That way, if something changes in your financial situation, you can show that it was unexpected, so you may not upset them if you have to change the terms of your agreement. Put it in writing too – this shows your commitment to repaying your debt.
The consequences of not paying it back
If you’ve borrowed money from someone and can’t now afford to repay it, the first thing you must do is tell them. Understandably with it being a friend or a member of your family, this may be tough – you don’t want to let someone close to you down. But by ignoring the issue, it looks like you’re being evasive or trying not to pay at all. The lender will always remember you owe them that money.
If, in the long term, you still cannot afford to repay the loan, you may be taken to court. This tends to be an absolute last resort, but if the person who has lent you money feels strongly enough about it, they may seek advice to try to settle the debt through the legal system. You can’t go to prison for debts to family and friends, but you could have other sanctions put in place to make sure you repay the money.
Of course, the less tangible consequence of failing to pay someone close to you back is the problems you’ll cause to your relationship. Borrowing money and then not paying it back will impact their trust in you, so always make sure you don’t take cash you know you can’t later repay and be honest about any changes to your circumstances.
If you do owe debts to a personal friend or family member, don’t think you can’t still seek debt advice. Support from professionals in dealing with debts can help you work out how to make your payments affordable, especially if you have other debts too, so that you can set out a realistic time to repay everyone.
Lending money to others
There is nothing to stop you lending money to your friends and family if you’re in the position to do so. The only condition is that, unless you’re a registered financial company, you cannot give out loans with the intention of charging interest or making a profit. You can suggest this informally, but you have no legal right to any profit – it would not be enforceable.
You need to make sure that you’re comfortable with the arrangement you make when you loan money to someone. Are you sure they’re going to be able to repay it, and have you discussed a repayment plan? What will you do if they don’t repay you? Will you miss the money and could it cause you issues with your own finances? Feel free to seek advice from others close to you if you aren’t sure.
If you’re sure that you can afford to lend someone money and that they will pay you back in a timeframe that you consider reasonable, then there’s nothing to stop you from helping out a friend or family member in this way. Just make sure it remains a part of open conversation – the longer debts between friends and family go unspoken, the more taboo they become and if the lender can’t afford to repay you, they may find it harder to speak to you about it.
How to say no
If someone close to you approaches you to ask for money, but you know you can’t really afford it, you should say no. Suggest alternatives to them, such as seeking debt advice with a charity or licensed agent, as well as other lines of credit they may be eligible for. But if you risk putting your own situation in trouble, and creating debt for yourself, then you simply must refuse to just give out money. Any family member or friend will usually understand if you tell them you can’t afford to help them.