30 April, 2015
A leading debt charity is today warning of the dangers of borrowing money from friends and family, as new figures show people owe more than ever to loved ones.
The total amount owed to friends and family by StepChange Debt Charity clients reached nearly a quarter of a billion pounds (£235 million) last year, an increase of £83 million in just two years. Over a fifth (21.7%) of those advised in 2014 had outstanding debt to friends and family, at an average of £3,265, showing that many people turn to this as a source of informal credit when they are struggling.
The charity is encouraging people to be aware of the risks associated with borrowing from loved ones.
In a recent poll of the charity’s clients, 56% of those surveyed said their relationship with their family had got worse as a result of their debt problems, and 45% said their relationship with friends had worsened.
Jonathan Chesterman, Advice Manager, said:
“Money can be an emotive subject at the best of times, but when someone is in debt to a friend or family member it can damage that relationship beyond repair. Any form of borrowing can further deepen financial problems. We would always encourage people to seek advice as soon as they realise their situation is out of control rather than take on extra credit commitments.”
Five questions to ask yourself before borrowing money from loved ones
1) How could this affect your relationship?
This may seem like an easy option now, but it could be a different story further down the line if things go wrong. If you borrow money from someone close to you, it’s best to be clear from the outset about how and when it’ll be repaid to avoid misunderstandings and arguments.
2) Can you – and the person you’re asking for help – afford it?
Nobody should put themselves in financial difficulty to support someone else. Make sure the person you approach can definitely afford what you’re asking of them, and that you can see a workable timeframe in which you’ll be able to pay the money back. Could their budget withstand the pressure if you weren’t able to pay back on time?
3) Do you know what your priority payments are?
Many people tell us that they have fallen behind on essential household bills in order to keep up repayments to friends and family. No matter how disloyal you may feel, payments like rent, mortgage, council tax and energy bills have to remain the top priority.
4) Are you asking a loved one to be a guarantor?
We speak to many clients who have taken on the position of guarantor for their family or friends, and then been left liable for the outstanding debt when that person defaults on the loan. Both parties need to be completely clear about what signing a guarantor agreement means.
5) Will this help in the long term?
Borrowing from family or friends may help for a short time, but if you’ve fallen into problem debt, you’re likely to need more support in order to get your finances back on track for good. Contact an independent debt advice organisation like StepChange Debt Charity to work out the best way forward for you.