Lending money to family or friends? How to make sure you get your money back

When a friend or family member asks you for a loan, it can be difficult to say no. Unfortunately, the judgement we use when dealing when handing money over to businesses or to make purchases, is often clouded when it comes to lending money to family or friends.

Unsurprisingly, it is not uncommon for family or friends to fall out over money, particularly when loans are involved.

If one of your friends or family has asked to borrow money from you, it is important to put the appropriate protections in place, in order to reduce the risk of running into problems further down the line.

Is it a good idea to lend money to someone close to me?

It is no secret that money can cause arguments - and even lifelong rifts - in relationships. However, when someone you know and trust needs your help, it can be difficult to say no.

If you are considering lending money to friends or family, make sure that you can afford to part with it. You do not want to put yourself in financial hardship in order to give them a loan, as this can significantly increase the chance of falling out. Equally, you should ensure (as much as possible) that they will be able to afford to repay the loan repayments you are proposing.

How can I prove that my friend owes me money?

If there are issues in the future, you will need to be able to provide proof that you loaned money to a friend or family member.

The best way to do this is by signing a loan agreement. This is a legal and binding contract between you and the borrower which details the terms and conditions of the loan.

The loan agreement will stipulate everything from the amount of the loan to its repayment terms.

This type of loan agreement is used for an unsecured loan (also known as a personal loan), where there is no collateral involved. This means that if the borrower does not pay the money back, the lender will have no entitlement to any of the borrower’s assets.

Of course, a legal contract can be verbal. However, if you do need to go to court in the future, having a written loan agreement that the court can see, may make a real difference to your case.

What if my friend does not have any money to repay the loan?

If your friend does not own any assets or have any cash, taking them to court to attempt to try to get the money back may not be worthwhile. You could end up with court fees and legal costs which could mean that any money that is owed, is used up.

However, if your friend does have the money, going to court to get your money back may be an option. As discussed above, this may be much more simple if you have a signed loan agreement, detailing the terms of your loan, which you can show the court as evidence.

Will I have to go to court to get my money back?

If your friend is having difficulty repaying the loan, it is normally best to talk to them first and see if you can come to some kind of agreement. Any change to the terms of the loan should be updated in writing.

If you are not able to reach an agreement or your friend or family member is refusing to pay back the money, you can let them know that you are intending to start court proceedings if they do not repay the loan. It is advisable to do this in writing, in the form of a ‘Letter Before Action’. This will give them the opportunity to pay you before you begin court proceedings. In the letter, as well as informing them that you intend to go to court, include a summary of the loan (the date and amount of the loan and when the repayments were due) and a reasonable timeframe for the loan to be repaid (as a minimum this should be one week).

Sometimes, seeing this letter is enough for someone to realise the seriousness of the situation and repay the money.

If your friend does not repay you, you will have to decide whether or not you want to take them to court. The government website details exactly how to make a court claim for money.

If your friend or family member will not pay back the loan you gave them and you do end up going down this route, having a loan agreement in writing can make a real difference to the outcome of your case.