If you’re struggling to make ends meet, it’s only natural to turn to friends and family members for help by asking to borrow money. In fact, one TikTok user has gone viral as she revealed she now shares a bank account – with a friend.

But is it ever wise to lend or borrow money in this way? We explore the benefits and (very serious) pitfalls of unofficial lending, as well as provide some tips on how you can make sure both you and your friend or family member is protected if something goes wrong.

Read on to find out more, or click on the links below to go straight to that section.

• How much do people lend?
• The advantages of lending and borrowing among friends and family
• The cons – and the con artists
• What about shared bank accounts with friends?
• The legalities – and resources that can help
• Other assistance that is available

How Much Do People Lend?

Lending money to friends and family is more common than you might think. A third of people in the UK are currently owed money by friends and family, according to research by Starling Bank.

The amount being lent out by friends and family is not small change, either – 35% have lent more than £500 according to the survey of 2,000 UK adults.

Nearly one in four (23%) are owed more than £1,000, 10% have handed over £5,000 or more, and 6% have lent upwards of £10,000.

The Advantages 

Broaching the subject of gifting or loaning money to family may be embarrassing, but according to a recent survey of 3,000 people by Hodge Bank, many people actually get a kick out of helping their friends and family with money, with 58% of over-75s saying they liked to lend their loved ones money.

Of course, you don’t have to be a financial wizard to work out why people might want to borrow money from the ‘Bank of Grandma and Grandad’ (or the ‘Bank of Bob from Work’, for example).

Clearly, your friends and family are a lot more likely to give you some help towards bills than a bank ever is. Getting a loan is a bureaucratic nightmare, and unless a bank is confident that it will easily recoup its money, it’s not going to lend you a penny.

This preference for wealthier clients by the big banks is why those who are struggling often have to turn to ‘pay day’ loans, or even loan sharks.

Of course, if you aren’t considered a risk by the banks, they’ll happily give you a loan at a far more-reasonable rate than a rapacious pay day loan provider. But the terms are still unlikely to be anywhere near as generous as you’d get from friends and family.

Exorbitant rates

According to MoneyNerd, the average interest rate on a personal loan taken out in October 2022 with a two-year repayment was 10.16%, although many lenders charge much more, with rates as high as 36% or above.

The amount you are charged will depend on a number of factors, including your personal credit score, and your collateral (i.e. the amount of money/property the bank could theoretically seize if you fail to keep up with installments).

For help working out how much money you could realistically hope to borrow through official channels, see here.

The Cons – and the Con Artists

Needless to say, lending or borrowing money from friends and relatives isn’t without risks – for both parties.

Most ‘lenders’ are not particularly wealthy, according to Starling Bank, whose study found that a third of people who have lent money to friends and family are low-earners (i.e. on an annual salary of less than £20,000), while only 11% are higher earners, on £70,000 plus.

Embarrassment and anxiety

What’s more, two thirds of lenders told the bank that they felt either too “awkward and embarrassed” or too “anxious” to ask for money back that they’re rightfully owed, while a third of respondents (32%) said they had to ask two or more times for the money to repaid.

As Starling Bank’s chief banking officer, Helen Bieton, pointed out: “Talking about money with friends and family can be awkward, but letting debts rack up can take a toll on relationships and our own financial wellbeing.”

She added that “nearly one in five (17%) started to resent their debtors and 11% avoided making plans with them in the future”.

“When they weren’t paid back as swiftly as they would have liked, more than a quarter of people in the UK (27%) got annoyed, 8% got angry or had an argument with the person who owes them [money], and 3% ended up in a physical fight.”

Difficulties saying “no”

Of course, the easiest way to avoid such potential disputes is to just say no. However, this is easier said than done.

In July, a study from the short-term lending service Moneyboat revealed that the average Briton loses over £500 a year due to this inability to assert themselves with friends and family.

As Elizabeth Richie, a psychotherapeutic counsellor at St Andrews Healthcare, explained: “Expectations from friends and family can blur the lines when we want to say no! This may include fear of being judged, fear of being selfish.”

Richie, who helped Moneyboat with the study, said that it is crucial to set boundaries and be mindful of the fact that “we cannot control other people’s responses to us”.

“The ability or inability to say no often stems from our childhood. We will struggle to say no when we are constantly seeking approval, we will find it easier to say no when we have experienced healthy attachments in early life and have acquired a healthy identity from our early caregivers.

“Ultimately being able to say no at the right time reduces stress levels, and gives you time to prioritise what is important for you and to be more discerning about your own needs and self-care without feeling bad.”

Could your friend be a loan shark?

There are, however, far greater risks involved with casual borrowing than just hurt feelings, as Jackie Spencer, the senior policy manager at the Money and Pensions Service, explained: “Another thing to be cautious about is borrowing money from someone you know casually, such as a colleague or a friend.

“It might seem like a good solution, but you should consider how much you really know them, as they might be a loan shark who lends money illegally and the loan could cost you more than you think.

“They target people who need to borrow money and can’t access it from legal sources and may resort to intimidation and even violence if you can’t keep up with repayments.”

To help prevent this, she stressed that any informal loan should be put in writing, and recommended people read this guide on how to spot a potential loan shark.

Other issues to consider

While it can be tempting to ask friends or relatives to lend you money, you need to think about not only whether you can afford to repay the loan but what might happen if you can’t.

People thinking of borrowing from friends and family really ought to draw up a budget using a resource like this, just like someone would do before approaching a bank for a loan.

“This will help you see how much money you have left for repayments and if you can actually afford it,” said Spencer.

“You should also consider the risk that this could harm or even end the relationship if the money is not repaid. It’s stressful enough if you can’t afford to pay back what you owe, but it can be even worse when you’re leaving a loved one out of pocket.

“If you’re not sure whether you should borrow from a friend or family member, there are other credit options – even if you have a poor credit rating and if you’re struggling with debts, there is help available through our MoneyHelper service.”

What to do if you are approached for a loan you can’t afford

It can be hard to refuse when a friend, partner or family member asks for financial help, but you should consider whether you can cope with the impact of not having the loan repaid. Take the time to work out your own budget before lending to anyone.

If your money is currently in savings, you’ll need to bear in mind that removing a large chunk of this will affect the interest you make each month.

What About Shared Bank Accounts with Friends?

As the cost of living hits us all, more and more people are considering setting up shared bank accounts with friends. Much like in a couple, they pay in part of their salary each month and use it to pay bills if they live together, or to save towards a shared goal like a holiday. So, instead of lending each other money back and forth (we’ve all asked for an extra tenner here and there from our best mate), their spending comes from the shared account.

A new viral trend on TikTok, shared bank accounts are being touted as a way to find accountability in your spending, as someone else can see everything you spend.

While sharing a bank account for housemates to pay bills together might be useful, it comes with big pitfalls. The funds aren’t protected – so anyone named on the account can take the whole lot at any time. In the example of TikTokker Caitlin above, she and her friend don’t always pay in equal amounts either, as sometimes one earns more than the other. This is the highest level of trust, because anyone in this situation could run off with the money they haven’t earned!

More than that, if your friend has a terrible credit score, or they put your joint account into debt, your credit rating will be ruined, too.

Joint savings accounts can work better and some banks recognise this. Monzo has a shared saving account that helps friends save together into one pot for a specific event like a holiday or hen do. However, the funds are still there for anyone to spend and your credit rating is now linked to the people named on the account.

If you want an accountability buddy to help control your spending in tight times, you could always set a weekly date to meet with your friend and go through your bank statements together. This will make sure you know someone else is going to look at your spending, helping you to curb impulse and unnecessary expenditure, without risking your funds being withdrawn by someone else.

The Legalities – and Resources That Can Help

If you are able to help a friend or relative in need, it’s still wise to take some legal precautions to safeguard both you and your loved one in case of unforeseen circumstances.

As Spencer from the Money and Pensions Service pointed out, it’s a good idea to put your agreement in writing so both parties were aware of exactly how much will repaid and when. “It’s also important to keep records of when repayments are made, so you both know how much is still outstanding.

“Having an agreement in place can protect you in unforeseen circumstances as well, such as if the borrower died with the debt unpaid as you’d need proof to claim from their estate.”

Legal templates

You can find lots of free template agreements online that both parties can sign and keep.

LawDepot has a very easy-to-follow, one-page form that should leave both sides in no doubts as to what was lent, and to whom. You can download it here.

Things to consider in any agreement 

The team at Hodge Bank has some great advice on things to consider before lending to friends and family. For instance, they suggest you should include details such as “a time frame for when the sum is expected to be paid back by, any interest (if applicable) and any consequences for missed payments – you may choose to set a fixed penalty or an interest charge for example.”

The bank also tells would-be lenders to consider things like collateral, adding: “If your friend or family member has anything of worth, this can be a good way to ensure your money will be returned to you.

“If your money was in savings prior to the loan, it may be a good idea to charge at least as much interest as it’d earn in savings to make sure that you don’t lose out. This will also ensure that the loan is seen as a loan and not a gift.”

Tax implications

Another issue many people overlook is the tax implication. If there’s interest being added to the repayment amount, you really ought to inform HMRC and fill out a self-assessment form as, depending on your income, the interest on any repayments may be liable for tax. Obviously, if you’re not charging interest, you won’t need to tell HMRC and, instead, just need to keep a detail of the loan and repayment amounts, in case you’re challenged about where the money came from.

Of course, it’s worth pointing out that many relatives (especially older ones) loan out money on the understanding that they probably won’t need it to be repaid.

It’s worth pointing out, however, that if the lender dies within seven years of giving the money away, the recipient may have to pay inheritance tax on it. For more information about inheritance tax, read our guide on estate planning.

What to do if there’s a dispute 

When lending to family and friends, there’s always the chance that they might not pay you back. If this happens, the first step is to talk to them and find out why this is. It may be due to something simple like a change in personal circumstances or other reasons beyond their control.

If the issue is due to a lack of funds, you should try to come to an agreement to amend the payment schedule or increase the length of the loan-period. If your friend or family member is being difficult and there’s a signed agreement in place, you can always seek legal action, if necessary.

For sums below £5,000, you have the option of taking the issue to a small claims court. For larger amounts, you may need to seek legal advice on how best to proceed.

Other help out there

If you or your loved ones are struggling financially, you really should try to reduce any debts and do everything you can to consolidate your finances before complicating the situation with yet more IOUs.

Charities like Christians Against Poverty give free help and advice to people struggling to keep their head above water financially – irrespective of their religion.

Its advisers should be able to help you cut your budget and get lenders off your back.

They work very closely with local Council Tax and Business Rates’ enforcement departments to create more-manageable payment plans for people who’ve fallen behind and are racking up court fees and penalty notices.

They also help arrange Individual Voluntary Arrangements, Protected Trust Deeds and Debt Relief Orders to clear any money you owe private businesses.

The charity has helped more than 20,000 become debt-free since 2010 alone, so they know what they’re doing.

You could also try Citizens Advice or Turn2us, who can not only provide some advice on clearing debts and dealing with angry lenders, but could also point you in the direction of benefits or other assistance you may not know you are eligible for.

More information

If you are struggling during the current cost-of-living crisis, you may find the following articles of use:

• 9 quick ways to organise your finances
• Mental health and money: How to stop debt overwhelming you

MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of lending or borrowing money should conduct their own due diligence. 

The post Is it wise to lend or borrow money from friends and family? appeared first on MoneyMagpie.

Welcome to Ask Jasmine, the column where I round up some of the questions I have received from readers. In this edition, I answer questions about making extra money, getting freelance work, mortgages and more.

I hope these answers can help you with any questions you may have. Don’t forget to leave any questions or money saving tips you have in the comments below or email me on askjasmine@moneymagpie.com.

• Making money at home
• Debit card or cash when spending abroad?
• How can I find freelance work?
• I’m worried about my mortgage

Making money at home

For the past year, my main issue has been the grossly inflated cost of energy, and my own bill has increased by £180 per month. I have been searching the internet for genuine home-based money-making opportunities, but I am always cautious about so many scams on the net. Any suggestions? 

Jasmine says:

We have a great article containing work-from-home roles for everyone here. We also have some great ways to make quick cash here. Sadly, most side hustles won’t make hundreds, but can be a great top-up. We just published an article (here) about some of the most lucrative side hustles right now, with links to other articles of ours that we think are of use. 

I do hope this helps. 

Debit card or cash when spending abroad? 

I would be very grateful if you could help with my question? 

My daughter, husband and their two girls are going for a short break to Disneyland Paris soon. As they have a budget, please can you confirm which would be the most economical – paying for things using their debit cards or paying with euros? If euros, please can you recommend where may be the best place to buy them from, to obtain the best price? 

Jasmine says:

In your daughter’s case, it would be better to exchange currency so she can keep track of spending. The best rate will depend on where you are in the country and which currency exchange outlets are near you. Some may also apply fees. 

You can also buy euros at the Post Office counter if changing under £400, with no commission charges applied. But be warned: the Post Office exchange rates aren’t great. If your daughter does need to use her debit card for any reason, you’re often given the choice to pay in euros or pounds – always choose euros.  

When you pay in euros using you card, your bank will do the conversion into pounds. If you pay in pounds then the shop/outlet will do the conversion, usually at a higher rate. Also, make sure she gets a receipt so she can check the transaction has been paid in euros. 

How can I find freelance work?

I am a person with a learning difficulty. I only work one afternoon per week. I am 57 years of age and finding it very hard to get a least another afternoon’s work. I have been up-skilling all this time, I have studied Graphic Design on Udemy.com and I have obtained two certificates in Affinity Publisher beginners to advanced.  

I was wondering, is there any design work I could do on a freelance basis?

Jasmine says:

We have previously worked with Paralympian Liz Johnson, who is an advocate for finding employment for those with disabilities. She created The Ability People, and she launched platform Podium to people find work. 

We also have loads of articles about becoming a freelancer, including these articles: here and here.  

You may also find the government’s Access To Work scheme useful. It helps people find work and can provide reasonable adjustments to your workspace. 

At MoneyMagpie, we also love Upwork – freelancers can advertise their services at a set price. Fiverr is also a good site for this. Guardian Jobs is also good for finding a range of freelance and work from home roles.

I’m worried about my mortgage

I’m worried about by mortgage as I am not on a fixed rate anymore. With the interest rate going up all the time, the monthly mortgage payment just keeps going up and up. 

I would like to go on a fixed rate mortgage, but I don’t have a squeaky clean credit score. Would you be able to recommend a company that deals with this? I only have eight years left on my mortgage. The way things are going, I am at risk of eventually losing my home if the interest rate keeps going up. 

Jasmine says:

Firstly, we have a great article about how to cope with increasing interest rates impacting your mortgage. It may provide a little insight into the help available. 

Secondly, we have some great articles regarding credit scores, and how there are many quick and easy things you can do to improve it – here, here and here.

I do hope these help in that sense – sometimes we may not realise we can perk up our score with little effort! There are also things that could be lowering your score without you even knowing. 

Although I am unable to advise specific companies, Experian have some great advice, as do Online Mortgage Advisor.

The post ASK JASMINE JULY: I’m worried about my mortgage appeared first on MoneyMagpie.

So what are the worries surrounding CBDCs? And how likely is it that a CBDC will replace cold, hard cash here in the UK?

To learn the answers to these questions, and more, keep on reading. Alternatively, click on a link below to jump straight to a specific section.

• • What is a Central Bank Digital Currency?
  • What are the worries surrounding CBDCs?
  • What is happening with CBDCs around the world?
  • Will CBDCs launch in the UK?

What is a Central Bank Digital Currency? (CBDC)

Central Bank Digital Currency (CBDC) is digital ‘fiat’ currency.

The pounds and pence in our pocket are an example of fiat currency. While these coins have no intrinsic or fixed value, and aren’t backed by any tangible asset, we just take for granted that they’re worth what they say they’re worth.

This is essentially how the whole global monetary system works, and it’s been that way since the introduction of fiat currency in the 11th century.

The move towards CBDC is essentially an attempt by central banks around the world to digitalise the fiat currency system. While this might not sound like a big deal, it most certainty is!

The reason why central banks around the world are keen to move us towards CBDCs is because they’re terrified about decentralised cryptocurrencies, such as Bitcoin, which have the potential to take the global monetary system out of the hands of governments. This is one of the reasons why some states, such as China and Egypt, have already banned crypto payments in their territories.

What are the worries surrounding CBDCs?

While CBDCs utilise some of the technologies used by cryptocurrency to facilitate transactions, it’s important to understand that there are huge differences between CDBCs and crypto. Once you get your head around these differences, you’ll see why many are concerned about the possibility of the world moving towards digital fiat currency.

First of all, unlike most cryptocurrencies, CBDCs are not decentralised. This is because the central banks control the supply of CBDC – the clue is in the name: Central Bank Digital Currency!

What this means is that central banks can print more fiat money into existence. This is not the case with many cryptocurrencies, such as Bitcoin, where supply is finite.

When central banks print money, it’s a essentially a regulated form of theft. To learn why, read our explainer about the evils of quantitative easing.

Now you may be thinking that quantitative easing already takes place with traditional fiat currency. This is true of course, but there are also other dangers associated with having a central bank controlling digital currencies.

For example, we’ve seen how the UK’s very own Bank of England has tried to tackle inflation by raising interest rates. If, in future, it has total control of every coin in our digital wallet, then it might wish to charge interest directly on the money we hold in our digital wallets, rather than go through the traditional route of hiking the base rate.

Similarly, should CBDCs become the norm, then it would be possible for government’s to attach an expiry date to our money – potentially useful if the state wanted to encourage spending to alleviate a struggling economy. While this might be a good thing for the health of the economy, it would essentially coerce the population into having to spend their capital quickly.

Likewise, CBDCs may also make it possible for central banks to control what we spend our money on. For example, if you haven’t been a good citizen, then the bank could, in theory, limit your spending to basic goods and prevent you from buying non-essential items. This ‘social credit system’ is already being developed in China, so it’s hardly science fiction.

In addition to this potential loss of control, CBDCs will also make it possible for governments to monitor our transactions and spending habits, making it easier to tax us at source.

CBDCs may also replace cash, which is the only way, besides cryptocurrency, that we can continue to spend our money anonymously.

What is happening with CBDCs around the world?

Despite all the fears, it is worth considering the fact that no countries have yet formally introduced CBDCs for everyday use. While Switzerland’s central bank has announced that it will soon trial CBDCs, traditional Swiss Francs are still a ‘thing’ (for now at least).

Expert in the industry do, however, suggest that China and India are the most likely regions to adopt CBDCs in the near future, with Hong Kong and Singapore other hot candidates given their advanced interest in CBDC technology.

While many fear CBDCs will eventually replace cash there is, thankfully, some pushback already. Slovakia recently announced it will amend its constitution to protect cash as a form of payment amid fears of a ‘digital euro’, and it’s possible other countries could follow suit.

Will CBDCs launch in the UK?

The UK is very much on the CBDC bandwagon. The Bank of England already has a webpage focused on the “Digital Pound” which has also been laughably referred to as “Britcoin” by Rishi Sunak when he was chancellor. This is of course a word-play on ‘Bitcoin,’ despite CBDCs going against everything that Bitcoin, and many other cryptocurrencies, stand for.

The Bank of England has already published a consultation on its proposed CBDC, and the bank says it plans to move onto the “design phase” for a digital pound over the next two to three years.

Should the UK press ahead and adopt the digital pound, the Bank of England says that the earliest date that it can be implemented will be in the second half of the decade.

Interestingly, the Bank of England explicitly states that the digital pound won’t replace cash – but let’s be honest here, does anyone really believe this?

If you want to learn more about this topic, MoneyMagpie CEO Jasmine Birtles, recently took part in a podcast discussing the potential shift towards CBDC. Click here to watch it.

And while we’re at it… do you want learn about investing? If so, why not sign up for our fortnightly MoneyMagpie Investing Newsletter? It’s free and you can unsubscribe at any time.

Disclaimer: When investing your capital is at risk. Remember, the value of any investment can both rise and fall. Always do your own research. 

MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

Cryptoassets are highly volatile and unregulated in the UK. No consumer protection. Tax on profits may apply.

The post Switzerland moves closer to adopting CBDC: Could the UK be next? And why does it matter? appeared first on MoneyMagpie.

Are there any signs of inflation dropping?

The CPI (Consumer Prices Index) has remained stuck at 8.7% in the 12 months to May, with core inflation rises from 6.8% to 7.1%. Meanwhile, food inflation has dropped to 18.3%, but service sector inflation has risen to 7.4. So what does this all mean?

Danni Hewson, AJ Bell head of financial analysis, said: “Inflation had been expected to fall – at least a bit – but it hasn’t obliged, remaining stubbornly sticky and cementing the prospect of a rate rise tomorrow as well as raising expectation that the hike will be higher than had been previously anticipated.”

What is happening with food inflation?

“There is a tiny bit of good news hidden in this troubling update from the ONS and that’s the rate at which food prices are rising, which has slowed, but it will be little comfort to all those facing huge increases in their monthly mortgage payments. Savings cushions have been eroded over the past year and there will be many households facing the real prospect of being unable to keep paying for the roof over their heads.”

Jasmine says…

MoneyMagpie’s Jasmine Birtles adds: “Stubbornly high inflation figures mean that the Bank of England is more likely to put up interest rates. However, I don’t think this will do any good. All it will do is create more pain for mortgage holders and businesses.

“It’s not a tool that will work in the current economic environment. We need to demand peace in Ukraine rather than fuelling the fire; we need to work harder at creating our own, cheaper energy, and we need to encourage farmers to grow more food rather than telling them to stop farming.

“Merely making money more expensive to borrow won’t help us in this country. Money is already ’too tight to mention’ in the UK. We need help, not a beating!”

Final word on this extended period of high inflation

Echoing Jasmine, Danni Hewson, concluded: “These inflation numbers show the Bank of England still has a big job to do if they’re to root out the inflation, which seems to have become embedded in the very fabric of our economic lives.

“There will be more pressure on the government to step in and help struggling homeowners. Support for struggling households during Covid, and the energy crisis has come with a significant price tag as benefits have been uprated and the government is also being hit with higher wage costs.

“We were warned that the medicine required to cure our inflationary ailment would taste foul, but the reality is proving more unpalatable than many had expected.”

For more on inflation, see our ‘What is inflation’ feature.

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