Have you lent money to a friend, family or colleague? Did you get it back? If so, you’re one of the lucky ones, as new figures show that around £2.6 billion went un-repaid last year.
The research was commissioned by O2 Money and showed that almost one in two adults lent cash over the last 12 months, handing over an average of £209.
Yet nearly half of those surveyed are still owed money; in fact the average is £112. So just how risky is lending to friends?
Friends with benefits
Officially it’s known as ‘informal lending’, but you probably think of it as bunging your friend a tenner when he forgets his wallet, or helping your sister out when her boiler explodes.
According to the O2 study, the most common reasons for lending people money are minor things. Maybe they forgot their wallet or you’ve paid a group bill to keep things simple.
But these are relatively small amounts. Some people are lending hundreds or even thousands of pounds. So why would someone choose to borrow from a friend or loved one instead of an official lender?
Cheaper. But cheerful?
Borrowing money can be a pricey business. For larger amounts, the rate can be as low as 5.9%, but if you want to borrow a couple of thousand pounds or less, you’re likely to pay closer to 20%. And the worse your credit history, the higher the rate you’re charged.
Payday loans charge an average of £25 a week for a debt of £100, making this one of the most expensive ways to borrow emergency cash.
So it’s easy to see why so many people turn to family and friends for an interest-free loan.
And of course, there are some people who may struggle to arrange a loan at all, perhaps because they have a poor credit rating or no real credit history to show they are reliable.
There are services that let you guarantee a friend’s loan – meaning they can borrow money regardless of their credit rating, as long as they can find someone willing to back them – but they’re far from cheap, and you could still end up on the hook for their remaining debt if they fail to meet their repayments.
Borrowing from friends and family can be a lifeline for such people, and keep them away from doorstep lenders or running up vast debts because of high interest.
Having said that, it may be cheap in terms of the interest charged but it can be very expensive in terms of lost friendships and even family feuds. That’s why it’s so important to go through some formalities.
How to lend to friends successfully
Anyone who’s ever seen a real-life small claims court will know that they are full of former best friends and estranged family members fighting over whether money was a loan or gift.
That’s why it’s so important to have a formal agreement set out between the lender and borrower before anyone parts with cash.
So the golden rule for lending to friends is to write up an agreement. How long will the debt last and what’s the repayment plan?
Draw up a signed, written agreement and even consider asking someone to witness the contract, especially if it’s for a large amount.
Never hand over a substantial amount in cash, you’ll want a record of the transaction in case the debtor claims they never received it. A simple bank transfer will mean there’s a paper trail.
Finally, make sure you keep track of any repayments. It can be all too easy for the debtor to think they’ve paid more than they have, or for the lender to miss a repayment. This can lead to a conflict that puts the whole arrangement, and friendship, in difficulties.
If this all sounds far too formal or you’re worried that you’d insult your friend by insisting on it then think hard. Would it be easier asking for a formal repayment plan before you lend the cash, or once they’ve failed to make a repayment and are avoiding your calls?
Just under a fifth of the people surveyed by O2 had loaned money on five or more separate occasions.
It’s tough being that person, especially if money is tight. But if you’re organising the bills for a shared house, planning a trip away with friends, or arranging a group-bought gift, it’s too easy to end up out of pocket.
But there are online services that chase and collect money on your behalf, like Payumi. It sends out payment requests and reminders, and keeps track of who’s contributed, so you don’t have to be the bad guy and chase people.
It’s free to use for individual payments of £20 or less, but you’ll pay a fee of up to £2 a time for higher repayments. If you’re confident that you can keep track of the cash on your own then you may decide to avoid these fees and collect payments yourself.
Never a lender or borrower be?
It’s easy to scoff at people who lend money and then never get it back. But it can be hard to say no when a loved one needs help.
The most important rule when lending cash is to only offer what you can afford, and ideally what you could afford to lose if they fail to repay. After all, it’s little use to anyone if you end up in difficulties too.
Have you lent to a loved one? Did it all go smoothly or did it ruin your friendship? Share your opinions and experiences in the comments below.