You’re short of a few bob. Your boiler’s broken down and the Bank of Mum and Dad can pay the bill. You’ll owe them a couple of hundred quid and pay back in six monthly instalments. All agreed with a shake of the hands.
But what happens if you can’t pay your debts? Owing money to a ‘faceless’ bank may be one thing – for a lot of people (rightly or wrongly) there are less moral issues involved with an unsecured loan. But if you owe money to your family or friends, then not only do you have the stress of debt, but the stress of owing to your nearest and dearest.
After all, you might be a (wo)man of your word and you want to pay the debt, but what if it all goes wrong?
£3,530 owed to family and friends
Let’s take a look at the figures. The average debt reported by our clients in 2010 was £22,476. Of this, £3,530 (nearly one pound in every six) was a private debt, owed to family and friends. We’re geared up to help clients with their financial creditors, but quite a sizeable amount of the money owed isn’t to lenders we can help with. Instead, they’re “flesh and blood” or “best mates”.
We started recording this data in 2008 after anecdotal stories from our advisors indicated that this type of lending was on the increase, possibly due to the lack of access to credit during the recession. The bank was saying no, so borrowers turned to relatives who said yes.
We found that most of the time repayment plans were in place, which was good to hear; the average monthly repayment agreed by clients who borrowed from family or friends was £124 per month.
However, for whatever reason, the total debt became too much to bear and the repayments, both to the bank and to the family, fell behind.
Pros and cons of borrowing from family and friends
There are obvious advantages to borrowing from family and friends rather than the bank:
- The loan can be agreed immediately
- There’s no credit check (your word is your bond)
- The money can be transferred straight away
- The loan will probably be interest free, with no late fees
- It’s better than going for a high-interest payday or logbook loan
- The repayment timescales can be more generous
- And if the worst comes to the worst, these debts can be held, perhaps indefinitely, until such time repayments can begin again
Given these advantages it’s unsurprising that a recent survey across eight European countries found that borrowing from friends and family was the second most popular way to come up with money quickly.
However, let’s look at the other side of the coin. £3,530 can be a lot of money, and one that can put pressure on the lender and the borrower.
From a purely financial point of view, the borrower has to agree a repayment schedule with the lender, and try to ensure they’re treated with the same respect as a financial institution (this Money.co.uk article that sets out the legal details of lending to friends – you can also use online borrowing tools like US website LendFriend).
The lender needs to understand that the money is going towards a good cause. A car that’s needed for work is understandable. A car that’s desired in an effort to impress the ladies (or gents), probably less so.
More important is the moral and emotional issue: the stress and guilt of owing to someone who could struggle themselves as a result of loaning money out. The borrower has to take a step back and understand whether the lender is hurting themselves by loaning money. They want to help, but are they harmed themselves in the process?
And worst of all, defaulting on – or worse, running away from – a loan from a family member doesn’t end up on a credit file, but can seriously strain (and in some cases permanently damage) a trust relationship. There’s a bulging forum thread on MoneySavingExpert devoted to stories from lenders who feel duped after loaning money.
Paying off your family and friends debts
The vast majority of these private loans are paid off. Whether it’s a broken-down boiler or a car that’s gone kaput, having family and friends rally to help you in your time of need (when no one seems to want to help) is one of the reasons our social relationships matter so much in life.
But as a borrower you must ensure you can pay the money back, because if you don’t it’ll affect more than just your credit rating. Remember that the Bank of Mum and Dad works both ways.
For more advice use our online debt advice, or give us a call. Whether you owe your dad or a debt collector, your brother or a bank, your pal or a payday lender, we can help.