It can be tempting to help out a friend by lending them money. But the most important thing is to be sure they can repay you. Otherwise, you could end up in financial trouble yourself.
Lending money to friend or family is only a good idea if you can afford it and you know you will get your money back.
You may just want to help someone you care about avoid high interest charges when loaning from a bank.
But you have to put your financial wellbeing first. If things went wrong, you could end up losing your money and your friendship.
Ask yourself if you can afford to lend the money. You need be okay without the money until they have repaid you in full. Remember, it could take them a while to repay the loan.
You need to be absolutely sure they can afford to pay you back. They may not be able to loan money from a bank because of a low credit score. A low score could be the result of poor money management.
Do not be afraid to ask them what they need the money for. Lending money for a new boiler in the dead of winter is most likely okay. Lending them money for a luxury cruise, less so.
Before you lend money to a friend or family member, think about (or ask them):
If they have a stable income
How much they earn
What other financial commitments they have
How effectively they manage their money
If they do not have much money coming in and are already struggling to pay their bills, another loan might not be best. If others have lent them money and struggled to get it back, you may want to be more cautious.
A guarantor loan is a more formal way of loaning money to family or a close friend.
They borrow the money from a traditional lender, but put you down as the guarantor. This means you'll have to cover any payments they miss.
You can compare guarantor loan rates here.
You could lose out if you take money out of your savings or reduce the amount you are paying off your mortgage.
You can charge them interest to mitigate that loss. Otherwise, you're essentially paying to lend them money.
You do not have to charge them the same amount of interest as a traditional lender. Consider asking for the same amount you would have earned if the money had stayed in your savings account.
There are a number of ways you can protect yourself against losing money:
Agree how much you'll lend them
Decide on the interest rate
Set the term
Agree how much you want them to repay each month
You must both be aware of all the terms and conditions before any money is exchanged.
Make the agreement clear and legal with a written contract. It provides a record of the agreement should there be a dispute later down the line.
You could get an independent witness to sign the agreement too. For further protection, it may be worth hiring a solicitor or speaking to Citizens Advice.
Once you've both signed the agreement, you can transfer them the money.
There will be a record of the payment if you transfer it by bank transfer or cheque. There will be no record if you just give them cash.
To ensure your friend repays you as per the agreement, they need to set up a standing order or direct debit from their account to yours.
You can ask your building society or bank to confirm this has been done. This may sound formal, but it's necessary to protect yourself.
Keeping a record of all the repayments ensures there are no disagreements later down the line.
If you need to change your agreement, make sure you revise your contract. Both of you should again sign it in front of witnesses.
That way, if your friend needs more time to repay, you can keep track of exactly what has been agreed.
It may not be necessary to obtain collateral when loaning money to a friend. But it could act as an extra layer of protection if you're worried they will not pay you back.
Collateral is something of value given to you by the person borrowing the money. Technically you can sell this item to recoup the money if they fail to pay you back.
Anything can be treated as collateral, but it's usually something of sufficient value to cover the amount of money you have lent out.
You'll need to agree what you'll hold and when you can sell it.
If your friend struggles to meet the repayments as agreed, encourage them to speak to you about the problem. Try to agree with them the best course of action to repay their debts.
It may be that you have to extend the term of the loan so they can spread out their repayments. Or, you could offer them a 'payment holiday' if their problems are only temporary.
But if they refuse to repay and you need to get your money back, you may have to go through the legal system:
If the loan is less than £5000, you could make a claim via the small claims court.
If the loan is more than £5000, you'll need to seek independent legal advice.
You can say no to a friend if they ask you for a loan. It is down to them to try to raise funds another way.
A Budgeting Loan from the Social Fund could be an option. This is an interest free loan for people who are already receiving certain benefits.
You could always direct them to one of our guides for other alternatives. For example,
our 9 Top tips for the best deal on a personal loan,
borrowing against your home, or the cheapest way to borrow money.
Help stretch your budget that little bit further by making the most of your savings. Compare market leading savings accounts to find the best savings rates for you.