Lending to Friends? Get Your Money Back

Should you Loan Your Friend or Family Member Money? 

When a friend, a family member, or a loved one asks you for financial assistance, you might feel like saying “yes” is the right thing to do. But helping financially to a peer or family member, no matter how well-meaning, can lead to awkward situations unless you are thoughtful about the risks involved. You need to balance your desire to help with realistic expectations about repayment.

Considerations Before Loaning Money

• Can I afford to lend this amount?

Only lend what you can afford to lose. If your finances or savings may be impacted, then you should think twice.

• Is this a one-time necessity or a repeating occasion?

If someone repeatedly asks to borrow from you, it may signify a deeper problem than the finances can solve.

• Will this damage our relationship if it goes unpaid?

Think about it: unpaid loans can lead to relationship tension and, certainly, eventually resentment.

• Have we agreed on clear repayment terms?

If you don’t have an understanding of repayment terms in writing or verbally, you can expect possible misunderstandings and conflict.

Protect Your Wallet and Your Relationship

If you decide to proceed with helping out, treat it with the same care as a formal financial transaction. Consider:

• Creating a written loan contract that specifies payback terms, timelines, and interest
• Using predictable payment methods (bank transfers) so there is a paper trail and the contract will hold up if questioned
• Discussing “what-ifs” openly, such as losing a job, being unable to make a payment on time, or needing to renegotiate?

Setting expectations upfront can help strengthen a relationship by eliminating the unknowns.

Things to Think About When Lending to a Friend

If you are seriously contemplating lending personal money to a close person, take time to view the situation from every angle. Before you just hand over any assistance, ask yourself and discuss with them the following: 

1. Can I afford to lend this? 

Only lend them what you are willing to lose. If a lack of repayment would end up causing a financial hardship for you, think again. 

2. Can they afford to pay it back? 

Consider their income, debts, and record of repayment. If their record of payback has been shaky at best, this is a warning flag. 

3. What do they need the money for?

Is it a true emergency, or could their situation be remedied in another way? The purpose matters, as it may affect the likelihood of repayment.

4. What is their financial history? 

If they are in the habit of repaying their loans, this may be a good thing. If they have not ever repaid you the money they borrowed, this is a warning sign you may want to consider. 

5. What is the payback plan? 

Make the repayment method and timeline clear. The repayment period should be realistic and clearly agreed upon.

6. Are there better options? 

Could your friend just find assistance elsewhere? Could their bank or credit union help? Could they ask another family member for help? Sometimes, giving them guidance rather than material help may be the best option.

Is A Guarantor Loan Better Than Loaning Money To A Friend?

If you want to help a loved one out but prefer a safer approach for yourself, a guarantor loan could be a good alternative to simply giving them money. It has structure behind it, but it does pose significant financial risks. Here’s what you need to know:

What Is A Guarantor Loan?

Your friend is borrowing from a lender (not you). You guaranteed on their application as a guarantor, meaning that you need to pay (or coordinate) the total amount of the debt if they cannot. It includes a formal contract, interest rate, and repayment plan, usually based on a lender’s standard template. Why it may seem better: 

• It avoids the awkwardness of directly borrowing from someone.
• The third-party lender sets the terms.
• It was a legal framework and paper trail.

The Real Risks to You:

• In the case that the other party is late or defaults on their payments, you are liable.
• The lender can demand the full payment of the debt from you, not just the borrower.
• The lender can report missed payments, which will adversely affect your credit score and your financial status.

When you co-signed a guarantor loan or lent your own money and it hasn’t been repaid, CaseCraft AI can help you with small claims through the UK small claims court, using your signed document as key evidence.

Will you Lose if You Lend Money to a Friend?

Lending personal  money to peers means you’re taking a risk that can be a real loss. You risk the possibility of losing the whole amount with essentially no legal recourse, or not being able to do anything with, or invest, that money elsewhere, and you risk losing a good companion if things go south with getting repaid. No amount of cash is worth ruining a good friendship.

To minimize the likelihood of these events occurring, approach lending your money as a business transaction. Get clear from the beginning on expectations and terms, and have them agree to that in writing (more on that later). If you treat the arrangement professionally and are transparent with expectations, you will increase your likelihood of securing repayment and maintaining your friendship.

Protect Yourself Against Big Losses

If you are considering lending money to help your loved ones, you should protect yourself from a big loss. You want to help your close one, but you also do not want to lose your assets. Here is what you can do to make the loan secure for you and for others:

• Make It Clear in Terms: The first step is to agree on the amount being lent, the repayment schedule, and decide if you want to charge interest. You will also want to clarify if you plan to receive one lump sum for repayment or follow a monthly schedule for payback. Using a simple agreement template that you can download and amp up with your own terms helps structure these details clearly.
• Put It in Writing: This step is very important; never accept a verbal promise when it comes to this. Create a simple agreement that details the amount lent, repayment plan, deadlines, interest (if applicable), and other conditions. Both you and the other party must sign. 
• Make Secure Payment Methods: When lending, do not use cash. Use a bank transfer for the lending payment and the repayment payments, as it creates a simple payment record. A record of payment becomes very significant if a dispute should arise.

• Maintain Repayment Records: For future reference, keep track of every payment (with dates and amounts) and also keep the messages related to the debt.  
• Review the Agreement if Terms Change: If you change your payback plan, confirm the changes in writing with signatures. This helps clarify expectations at every stage.  
• Consider Collateral for Large Borrowings: If you are lending a large sum, request collateral until the debt is fully repaid. If that’s the case, ask for collateral, something of value, for example, a car or asset, until it is paid back in full. 

What Happens if Things Go Wrong?

There can still be bumps in the road, even if agreements are clearly stated. If your peer can’t pay when needed, talk to them early so you can shift the plan if needed – just get it in writing. In case your friend stops responding or does not pay:

1. You can try to renegotiate the loan terms, but be sure to document any changes. 
2. You want to keep all records related to the debt, including the contract, messages, notes, and payments, as they will be important as evidence if you proceed with the legal route.
3. Consider using a legal tool, such as CaseCraft AI. If you’re in the UK, you can use CaseCraft to lodge a small claim quickly without a solicitor.

Legal action is no guarantee of repayment, but by keeping the right records and using the right tools, you are not without options. CaseCraft provides a way for you to act when perhaps you feel there are no further options. Want to know what your claim might be worth? Take a look at our Money Claims Map, where you can see real cases and actual compensation amounts.

Are There Alternatives if You Say No?

It’s completely acceptable to turn down a loan request to a close person. On the one hand, it can stress your budget or finances, and on the other, it could damage your relationship. You could also help them in other ways. Encourage them to approach free debt advice services. 

Suggest looking beyond family, and that they consider credit unions, government help, or even practical ways to cut back on spending or increase their income. Honesty and empathy show you care, even if you can’t lend them money. Looking after your finances does not mean you are not caring for them; it means you are being sensible. CaseCraft AI runs on a “no win, no fee” basis, with no upfront cost, and you only pay if your claim succeeds. A risk-free way to recover unpaid personal loans.

Note: This content is for general guidance only and is not legal advice. 

And if you have already lent the money, and the borrower hasn’t paid you back, CaseCraft AI can help you recover it.

Start your claim