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The bank of friends: 7 tips to avoid the pitfalls

6 April 2017

A strange topic you might think from a payday lender or indeed any commercial organisation to talk about informal borrowing and the pitfalls, however we think it does deserve some serious airtime. There are lots of factors to consider whether you are borrowing from a friend or indeed lending to them. The borrowing or lending might be actual cash, a promise to pay, a payment in kind or another form of "credit".

If you have been approached by a friend for emergency cash, although you may feel very strongly about helping them out, there are a number of factors you should take into consideration which we have set out below.

borrowing money from friends

The background to the request

Consider what the request is for and why they have come to you. We are not suggesting turning yourself into an underwriting officer and start asking to see passports etc. however it might be worth considering how much of an emergency the request is. Is it for a priority bill or necessity, say for example they need help paying for an MOT as they need their car for work, or is it to fund a night on the tiles? Either scenario may be worthy of your cash but that's down to you to decide and discuss with your friend.

Check you can afford to lend

Do you have enough clear cash to lend the money to your buddy? Lending some of your hard-earned savings is a risky manoeuvre. Consider that if you remove your own emergency buffer a single unexpected call on your cash could land you in the same position. Before making a decision to part with your money, ensure that all your priority outgoings are dealt with, including future commitments. Also, make sure you include an emergency fund in the bank or elsewhere that you can call on if things don't go to plan. Using a cash advance is not always the answer.

What are the repayment terms?

Just bunging your mate a stack of notes and crossing your fingers is probably not an ideal way for both parties to conduct themselves. It's reasonable for you and your friend to agree the method of repayment, the frequency and on what basis, upfront. That way everyone knows what to expect. Why not ask your friend to set up a standing order to your bank account each month or week and create your own record that has the total amount lent, the repayment dates, the date they actually paid, the amount and how much is left to pay. However you record it make sure you share this with your friend so that they can also easily keep track of the repayment amounts.

The benefits of this regular repayment are numerous:

  • Peace of mind for both parties - your friend is released from constantly having to remember to pay you at the right time
  • Stops large sums arriving in your account in one go - big sums landing in your account at random points doesn't help you manage your cash flow and may be tempting to spend in one go. It may also distort your own financial position.
  • Audit trail - using standing orders and bank transfers means that both you and your friend can audit the repayments, easily see how much has been paid and how much is left outstanding

Get it in writing

It's all very well going with a "my word is my bond" type arrangement, in practice though this rarely seems to work out for either party. Even if you trust your friend to keep to the terms set, not having it in writing could put you in a sticky situation further on down the line if things go wrong. Having written details that both of you agree to, preferably with a signature, is a great way to avoid misunderstandings. Should any further formal action ever become necessary, a written agreement is a much clearer way to show a court, which at the end of the day, protects you far more than words alone.

Go through what happens if the worst happens

If talking about the loan terms might seem awkward enough, then you are going to need to take a deep breath to raise the issue of what happens if it all goes wrong. It's important to consider worst-case scenarios. Why I hear you ask, well sitting down and talking about what would happen if your buddy doesn't pay you back or is late in paying you can be helpful to both of you. It lets your friend know that you are serious and may even make them consider whether they really need the loan or whether you are the right person to borrow from. Talk about a plan of action, be it late charges, a collection process, or even legal action. While it might sound quite formal and indeed create an air of bad feelings, it will eliminate any surprises if your friend wasn't to repay. Remember if they have more fundamental issues with debt they can seek help from the moneyadviceservice.org.uk, a site for free independent debt advice.

Arms length is best

Keep your distance is the essence of this tip. Whilst we have been keen to emphasise being professional that doesn't mean you can assume a position of power. There is no need to make the arrangement public nor oversee their expenditure. If you trusted your friend enough to lend in the first place they you need to continue that trust. Obsessing over how they conduct themselves and how the funds are spent will only create issues. Be a pro, acknowledge that the situation is under control and focus on your friendship.

Saying no is ok

At the end of the day, you are friends and that's what really counts. If one or both of you think that lending money might jeopardise that in anyway then don't run the risk. Having said that, sometimes friendship trumps common sense and it's not really a loan but more of a gift. That is totally fine too and to be honest a great place to start. However, do be wary that you are not being taken advantage of. An acid test regarding making a lending decision might be asking, would you feel comfortable being the borrower? If the answer is no, then maybe it's ok to say that. Your friend should understand.


Following our tips above might help you avoid the most common traps when lending to your friends and indeed your family. If you use your head and be open, honest and upfront, both parties should get on fine. However, it may be the case that your friend might be better off borrowing from a responsible and reputable professional lender. If that's the case, then make sure to search around for the best deal or direct them to make an application with 247Moneybox.