Lending to or borrowing money from friends and family

What to consider before lending to or borrowing money from loved ones

Matt Finn | Edited by Gary Caffell

Updated 28 June 2024

If you ever need a quick cash injection, borrowing from someone you know may seem ideal – and you may be happy to be the lender if you can afford it. However, borrowing from loved ones or lending money to friends and family aren't necessarily the best solutions. Learn more, including what you need to consider when doing so, and how to lend to or borrow from loved ones safely, in this guide.

Who’s this guide for? This guide is for anybody who’s thinking about lending to or borrowing money from friends or family.

If you're borrowing to pay off debt or because you're really struggling, first see our Debt problems & help available guide.

See all our credit card & loans guides.

If you're the borrower: What to consider before borrowing money from friends and family

When considering borrowing from friends or family members, there's a lot you need to consider first...

Is it a good idea to borrow money from loved ones?
Before borrowing money from friends or family, ask yourself the following questions:

Will it impact our relationship? Do you think being indebted to your friend or family member could put pressure on the relationship? Consider how close you are and whether borrowing from them could impact things before proceeding.

Do they feel like they can say ‘No’? If a loved one sees you struggling financially, they might feel obliged to help. Although this may be fine, it’s worth thinking about what your own response would be. Do you want to put them in that position?

Could I borrow the money elsewhere? Borrowing from family or friends can be the most affordable option, however, it’s not the only one. From personal loans to credit cards, you have various alternatives. Learn more about these options below.

How will I pay them back – and can I afford to do so? You’ll need to consider how the loan repayments will be structured, the repayment period and whether your loved one will charge interest, plus how much.

Should we get the agreement in writing? While this may seem like overkill, it’s a good idea for several reasons. One is that it gives you and your loved one clarity over the deal, another is that it provides protection should the deal or relationship break down for whatever reason. Find out more about creating a written loan agreement below.
How do I borrow money from a friend or family member?
So, you've decided to go ahead with borrowing money from a loved one. How exactly do you do so safely?
Assess your needs. How much are you looking to borrow exactly? Don’t ask for more than you need, as this will put you in unnecessary debt. Then, work out how much you can feasibly afford to repay each month. This helps you AND gives your loved one concrete numbers to reassure them about the agreement.

Don’t borrow from anyone. Don't borrow from any Tom, Dick, or Harry – we’re talking colleagues you barely know or that friend you haven’t spoken to in years. If somebody you’ve only met recently offers you money, be wary as they may be a loan shark. This could mean unreasonably high interest rates on repayments.

Pick the right borrower. Instead, choose somebody you know and trust. They also need to be someone in a good financial situation who can afford to give you a loan.

Get the agreement in writing. Getting the loan agreement in writing helps you avoid any arguments or disputes over payments in the future – plus it gives you both protection should one of you breach the agreement.
What are the advantages and disadvantages of borrowing money from friends and family?
Here are the pros and cons of borrowing from friends and family:

The advantages

Lower or no interest. Family and friends might offer loans with little to no interest, making it a cheaper option than a formal personal loan.

Flexible terms. You’re more likely to get a more flexible repayment schedule with a loved one. For instance, if you lose your job or need to make a late or early repayment, they’ll probably be more accommodating than an official lender.

Simplified process. Borrowing from a friend or family member doesn't involve a formal loan application, credit checks and other admin.

Quick access to funds. The process can be quicker, with no lengthy approval processes involved.

The disadvantages

Relationship strain. Missing a payment or any kind of dispute can put a strain on the relationship. The best-case scenario is that this makes things awkward for a while, the worst is that it affects your relationship forever.

You won't build up your credit history. Borrowing from a friend or family member doesn’t help you build up your credit history like getting an official loan does. This could make it harder to get credit in future. See How to build your credit history as a student or young person and learn more about credit scores in our guide.

Limited borrowing amount. The amount you can borrow is what your loved one can comfortably afford, which might not be enough.
How do I create a formal agreement for borrowing money from friends or family?
You should first verbally discuss and agree on the terms of the loan and make sure both parties 100% agree on them. These include the loan amount, interest rate (if any) and repayment schedule, among other conditions, such as any late payment fees.

For smaller sums, an informal written agreement is probably enough. However, if you're borrowing a particularly large amount or just want extra peace of mind, get in touch with a legal professional to take you through the process.

You should also update the agreement if anything changes, such as the size of the repayments, and keep a record of any repayments you make. This prevents disputes around missed payments or how much is left to pay.

Key aspects of a loan agreement

All in all, a formal loan agreement between family members or friends should include:

Both the lender's and borrower's personal details

The exact amount being lent

The purpose of the loan

How and when repayments will be made

If interest will be charged, the interest rate, and how it will be worked out

If collateral (an item pledged as security for the loan) is to be used and the circumstances in which the lender can claim it

What constitutes a default on the loan and the consequences of this

You and your loved one should both sign and date the agreement too.
How do I repay a loan from a family member or friend?

Once it has been agreed how much you'll repay each month, you should set up automatic monthly payments via your bank, so you don't miss one. It's important you also keep a record of all payments made, including dates and amounts, to ensure there is no dispute down the line of what you still owe.

If you think you might struggle to make a payment, chat with your friend or family member as early as possible to discuss potential solutions or adjustments. On the flip side of this, if you come into money (lucky you!) – perhaps you get a bonus or a tax refund, for example – consider using it to make a lump sum payment towards the loan (assuming there are no early repayment penalties), so you pay it off quicker.

When you complete your final payment, it's worth getting confirmation in writing that the loan has been paid in full.
What are the consequences of not repaying a loan from friends or family?
As with a normal loan, you should ensure you pay it back to the agreed terms. If not, it could lead to:

A strained relationship. Failing to repay a loan can damage the trust and goodwill in your relationship. Not ideal.

Financial impact on you. You may have agreed to a penalty in the event of a default, which will obviously impact your finances.

Legal action against you. In extreme cases, your friend or family member may take legal action to recover the money, leading to additional costs and stress.

Financial consequences for them. Not repaying a loan to a loved one will naturally impact THEIR finances. After all, they were counting on getting the money back to an agreed schedule.
What are the tax implications of borrowing money from friends or family?
Here's what you need to consider:

Interest-free loans. There are no tax implications for either of you if the loan is interest-free.

Loans with interest. You don’t have to pay any tax on an interest-free loan, however, any interest received by your lender IS considered taxable income. They must declare this on their self-assessment tax return and pay tax on it according to their income tax bracket. Our tax and benefits guides can help you check you're paying the right tax.

Gifts. If the money is not expected to be repaid, it's legally considered a gift and different tax rules apply. Gifts are generally not taxable for recipients, however, if the giver passes away within seven years of giving the gift, it may be subject to inheritance tax (IHT). If a loan is written off before it is paid back and effectively turned into a gift, it might be considered a potentially exempt transfer for IHT purposes. To avoid any potential tax complications and clearly differentiate a loan from a gift, it is best to have a written loan agreement.

Capital gains tax. Generally, loans themselves are not subject to capital gains tax. However, if the loan is converted into equity in a business or property, capital gains tax implications could arise. For example, if you are lent money by a family member to buy a property which you will then part-own with them, you’ll both be liable to CGT if the property is later sold.
What are the alternatives to borrowing money from friends and family?

If you decide borrowing from friends or family isn't a road you want to go down, or if that isn't possible, there are other options you could consider.

A personal loan

With a personal loan, you'll borrow an agreed amount from an official lender and will pay it back over a set period in fixed monthly repayments, plus interest.

In contrast to borrowing from friends or family, personal loans come with formal structures, help build your credit, don’t risk relationship strains, and likely give you access to larger amounts. However, they may be harder to obtain, have higher interest rates and be less flexible. Read our How to get a personal loan guide for full info and how to find the cheapest borrowing.

A guarantor loan

A guarantor loan is similar to a personal loan, but with one key difference: you include somebody else on the application to be your ‘guarantor’. This individual is legally required to make your repayments if you can’t.

They are typically a lot more expensive and restrictive than personal loans – find out more on our guarantor loans page.

A 0% credit card

If you are accepted, 0% spending credit cards are the cheapest way to borrow. You'll get a set number of months where no interest is charged on new purchases (you just need to pay off the monthly minimum).

This can save you £1,000s compared with the same borrowing on a standard credit card (assuming you pay them off over the same period of time).

See how to spread costs with a 0% spending card, plus our eligibility calculator will show you the cards you've the best odds of getting before you apply.

A gifted deposit

If you need money for a mortgage, a gifted deposit may make most sense. This is a cash gift given to pay for some or all of your deposit. Family or friends can gift you as much as they like, though they should be aware of the inheritance tax implications.

The main advantage of gifted deposits is not having to pay the money back. However, this does make them much harder to come by. Gifted deposits also have some of same potential drawbacks as borrowing from friends and family – namely the risk of relationship strains, as well as no credit building.

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If you're the lender: What to consider before lending money to friends and family

So, we’ve looked at the implications of borrowing money from friends and family, but what about from the other side of things?

What are the risks of lending money to family and friends?
Agreeing to lend someone money is not a decision you should take lightly. Here's what you need to consider:

Losing money. Not only will you lose money by giving your loved one a loan, but there’s also a risk they won’t pay it back. This can impact your ability to meet financial obligations or deal with financial emergencies. So don't lend money if you can't really afford it.

Strained relationships. A friend or family member struggling to make repayments can foster resentment and conflict. Saying 'No' to a loan may be for the benefit of your long-term relationship. And if they are not a close friend, for instance they are a friend of a friend, it's probably best to say 'No' anyway.

No or low returns. Ultimately, you won't gain much by lending someone money – apart from helping out a loved one in their time of need. You could charge them interest, but the earnings you make from this are likely to be minimal in comparison to what your cash would earn in a top savings account or other forms of investment.

Tax implications. Any interest you charge on the loan is subject to income tax and you must declare this on your self-assessment tax return. The tax you pay on it will depend on your income tax bracket. Our tax and benefits guides can help you check you're paying the right tax.
How do I deal with a loan request from someone I care about?

Firstly, assess your finances to see if you can afford to lend the amount requested. Then, ask your loved one about the loan’s purpose to gauge the urgency and necessity of the request. This will help you make an informed decision.

You also need to assess the likelihood of them paying you back. Consider how much you know and trust this person too, as well as what impact the loan could have on your relationship. Ultimately, make your decision based on your comfort level and willingness to risk potential financial loss and relationship strain. It's okay to say 'no' if you’re uncomfortable with the arrangement.

If you're still uncertain about whether to lend the money, consider seeking advice from a financial advisor to better understand the potential risks and benefits. You may also be able to help your loved one in other ways.

If you proceed with the loan, set clear boundaries and terms to protect you both. Have an open and honest conversation about the loan – mainly your expectations regarding repayment and the potential consequences of non-repayment, both financially and to your relationship. You should also draft a formal loan agreement before sending any money.
How can I protect myself when lending money to friends or family?
If you have decided you are willing to be a lender, it's important you protect yourself as much as possible.

Create a written agreement. A written loan agreement is essential. For smaller amounts, an informal written agreement is probably enough. However, if you're lending a large amount of cash, get in touch with a legal professional to take you through the process. This not only helps prevent misunderstandings, but can act as a legally binding document should something go wrong. You’ll be able to use this as concrete evidence of the loan terms and conditions.

Keep detailed records. Maintain thorough records of payment receipts and all correspondence related to the loan. This includes emails or messages discussing the terms or repayment status.

Set up a payment schedule. Create a clear and manageable repayment schedule. Consider using online payment methods with automatic records, such as bank transfers or payment apps.

Consider the tax implications. If you charge interest, you may need to report this as income. You also need to be aware of potential gift tax implications.

How can I set boundaries when it comes to lending money to family or friends?

Helping others can be incredibly rewarding, however, there are times you need to put yourself first. Here's how to set boundaries when lending to loved ones.

Set your limits. Have you ever lent money to others because of feelings of guilt, pressure or obligation? By recognising these unhealthy lending habits, you can learn how to say no and create financial boundaries with your loved ones.
Prioritise your own finances. Even if your friend or family member is well-intentioned, it’s important to put your own financial goals and wellbeing first. Our Budget Planner can help you work out what you can afford.
Say no with compassion and clarity. If you do say 'no' to a loan proposal, do so with compassion and clarity. You could even discuss alternatives with your loved one.
Only lend what you can afford. However, if you DO decide to offer your loved one a loan, only lend what you can afford. Clearly communicate your expectations with your friend or family member when it comes to things like repayments, and make sure they understand these before proceeding.

Warning: Beware the dark side of financially linking up with a loved one

Financial abuse is when someone controls your finances or ability to earn money, so as to reduce your independence and force reliance. And, sadly, it's a form of abuse thousands in the UK suffer from.

If a loved one is, for example, pressuring you to take out debt for them in your name, emotionally blackmailing you to pay their bills, or controlling access to your money, you could be a victim. Thankfully, financial abuse is legally recognised as a form of domestic abuse, and offenders can be prosecuted.

Read Martin's Financial abuse blog for advice on how to spot the warning signs and where to get free help.

How can I assess whether the borrower will be able to repay the loan?
Before agreeing to a loan, you want to know you are likely to get your money back.

Understand their financial situation. Ask your loved one about their sources of income (for instance, employment, business and investments) and how stable these are. You could request a breakdown of their regular expenses too, including any existing debts and their repayment schedules.

Evaluate their repayment plan. Ask them to outline their repayment plan, including how they will source the money required. Discuss what they will do if their primary source of repayment is interrupted – for example, they lose their job.

Assess their financial behaviour and reliability. Consider their past financial behaviour. Have they borrowed from you or others before, and did they repay on time? Do they manage their finances responsibly? If appropriate, ask for references from others who have lent to them.

Ensure the loan amount is reasonable relative to their income and financial obligations. Set terms that are realistic for their situation – for instance, shorter repayment periods may be more challenging, whereas longer terms could be more manageable.
What are the alternatives to lending money directly to a friend or family member?
If you choose not to lend directly but still want to help, here's what you could consider...

Offer non-financial assistance. You may want to help your loved one create a budget, or do a 10-minute benefits check with them using our Benefits Calculator to ensure they're not missing out on additional help.

Provide a gift instead of a loan. Consider giving a gift instead of a loan if you can afford it. This at least removes the stress and potential conflict of repayment. Though do be aware if it’s a gift but you expect a share in the property, there’ll be capital gains tax implications.

Help them earn extra income. See our Boost your income guide for 60+ ways to earn extra money.

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