Asking for financial help from a family member or close friend can feel awkward, but provided you’re both clear on how the arrangement will work, it can have its advantages.
After all, someone who you know personally is likely to be more forgiving if you’re having trouble repaying what you owe, and hopefully won’t charge you much (or if you’re lucky, any) interest.
On the other hand, the last thing you want to do is create arguments over money with someone you’re close to. Borrowing from someone you know is not a decision to take lightly, and both parties should plan carefully and communicate often to avoid tensions.
When should you ask a friend or family member for money?
The answer to this can of course vary enormously, depending on your circumstances, who you’re asking, and the reason you need the money. You might be more comfortable asking for a large amount from a parent, for example, than from a friend or sibling.
It might be a good rule to only borrow if the amount is not too significant and you know exactly when it will be repaid by. A loan that you could confidently repay in a year or so is probably a reasonable request, but you should still be prepared for the answer to be no. If you’re thinking about a much higher amount, you might want to consider some alternatives.
One compelling reason to borrow from friends or family is that they probably won’t charge you much interest, meaning you’ll only have to pay back the amount you borrowed from them, or a little bit extra.
What are the risks of borrowing money from friends and family?
Mixing money and relationships is always a bit of a risk. If you fall behind on repayments, it could well create tension between you and your friend or family member and damage your relationship, especially if you have borrowed a particularly large amount.
Note that if you borrow a friend’s credit card and run up a large bill, they’ll be held responsible for it by the lender which could well be a cause of resentment, as well as having a lasting negative impact on their credit score.
If you fail to pay back money that you owe, your friend or family member could take you to the small claims court over it. It goes without saying that neither of you want to be in this position.
The best way to reduce the likelihood of a falling out is to sit down with them and make a very clear plan about how you’re going to make the repayments – where you will get the money from, how often you will repay and how much each instalment will be, what happens if you miss one, and so on. Keep in contact throughout the repayment term and be honest if you think there might be a delay in a repayment or another issue – they are likely to appreciate it much more if you are upfront about a problem rather than if you leave it for them to find out themselves.
Will I be taxed on money borrowed from a friend or family member?
Money given in this situation will be considered a gift for tax purposes. This means that it will not be taxable unless the lender dies within seven years of making the gift. If this does happen, it may be added onto the value of their estate and charged inheritance tax at a rate of 40%. You can learn more about how inheritance tax works in our guides Understanding Inheritance Tax and Which gifts are exempt from Inheritance Tax?
Everyone is entitled to gift up to £3,000 tax-free each year, so if the loan amount is lower than this and no other sizable gifts have been made that year, it will not be taxed. Gifts also aren’t subject to inheritance tax provided the donor lives for seven years after making the gift.