If a pal turned to you for financial help, would you lend a hand? If you have the cash it’s hard to say no, but for the sake of your future friendship that may not be such a good idea.
Money can be the root of all sorts of relationship evils. It’s the cause of many families or friends fracturing and so any planned financial arrangements need to be treated with extreme caution.
Research published today by StepChange debt charity shows one in three people who owe money to loved ones reporting negative effects caused by their financial problems. One in 20 says borrowing from a friend actually led to a relationship break-up.
It’s a growing problem, according to the charity. The number of people seeking debt advice who owe money to friends and family is rising rapidly and the average amount borrowed is now more than £4,000.
|Total debt to friends and family||Average Debt||% of clients||Amount of people|
|First half of 2014||£115,049,807||£3,176||20%||36,259|
|First half of 2015||£155,934,645||£3,570||26%||43,545|
|First half of 2016||£198,450,523||£4,046||28%||49,048|
Yet it still remains the first port of call for many. Why? Because it’s easy and can seem painless. In many cases people are happy to hand over their hard-earned to family or friends with no expectation of ever getting it back.
One friend, for instance, tells me he owes his dad an ‘obscene amount of money’. He adds that ‘he probably has no idea just how much I owe him’.
In other words, he’s happy with the arrangement. Happy to help his son and happy to be able to afford to be without the cash.
Not many of us are in such a wealthy place. And that means that a well-meaning attempt to help a struggling loved one out could even cause us to face financial woes.
Look, the secret to happy financial management is planning a budget and keeping to it. That includes squirrelling away whatever cash you can for a rainy day. In short, it’s what we call emergency money.
If you have that money saved, when a friend turns to you in an emergency then it can be tempting to help. But you should be aware of the potential consequences.
StepChange reckons that borrowing from friends and family can make people’s financial problems even worse and bring other risks, such as delays to seeking debt advice which can be crucial in getting finances back under control.
For that reason you should follow some simple rules when tempted to lend money. It may seem against the spirit of the loan, but it will ensure that relationships remain solid.
The most important thing is to clearly explain your position. Say you are worried that the money may rip apart your relationship. Talk about how you both feel about the arrangement.
If there are any uncomfortable feelings, find out if you can help in other ways. For instance, you could offer to help people set up a budget so that they can get their finances back on track.
In fact, doing so may be much more helpful than just handing over cash.
Helping people with budgeting can prove to be a long term solution. A loan may only help in the short term.
‘It is good that people support their friends and family, but lending them money can bring serious and unexpected problems,’ warns Mike O’Connor, chief executive of StepChange.
‘If they are already in financial difficulty, more borrowing is not necessarily the answer and it can make things worse. People need to take practical action to solve the underlying debt problem.’
If you decide to go ahead with the loan and expect to get your money back, it’s essential to set a repayment deadline and even arrange monthly repayments until it’s repaid.
Don’t feel embarrassed about discussing the debt. If you don’t talk about it, tensions will mount and quickly lead to problems. Gentle reminders are much better than angry demands.
But the best thing you can do for a loved one in financial difficulties is to try and help them get over their problems.
Simon Read is a writer and broadcaster and former Personal Finance Editor of The Independent