The concerning rise of ‘mates rates’ and the ‘Bank of Mum and Dad’

By Rob White

It’s a familiar scenario. Someone’s short of money, so their friends and family want to help out. They offer a loan, interest-free, and the person takes it on.

Given that most of us will need to borrow money at some point in our lives, it can be a handy facility to draw on, so it’s hardly surprising that we turn to those we trust.

It may be even more common during these austere times in which we live, where owning a property without the help of parents has become a dream rather than an aspiration for many.

Borrowing from someone you know brings accessibility; there’s no credit check and the application process is certainly much simpler. We even have a term for it — the ‘bank of Mum and Dad’.

For the most part, these loans are repaid, the borrower benefits and the friend or family member gets a sense of reward from helping out. But what happens when it’s not repaid?

£200m of debt to family and friends

Our latest stats, drawn from the first half of 2016, show that friends and family lending is on the rise. More than a quarter of people who contacted us for debt advice in that period owed their friends and family money.

The average amount had rocketed to £4,000, the total amount nearly £200 million.

Owing a family member £4,000 is clearly a problem if you can’t easily repay it, but what other effects can this type of borrowing have?

The negative impact of borrowing on relationships

We already know that debt puts strain on relationships with partners, family and friends. When we polled 1,000 indebted people around one in five of them reported negative effects on their relationships with friends and family. Even more concerning was that a third said the same about their relationship with their partner, with one in 20 saying they broke up as a result.

Our research shows nearly 200,000 relationships end because of debt.

With the added pressure of the friend or family member being their lender, it could cause even further damage to someone’s relationships, pushing the lender into financial difficulty themselves.

Where the borrower is already in financial difficulty, there can be further consequences: borrowing more money means they risk not addressing their debt problem. Worse, it could delay them getting the free debt advice that they might desperately need.

Is borrowing from a loved one ever a good option?

So should anyone ever borrow from friends and family? As with any type of borrowing, they need to think carefully before they commit. They need to decide whether they need it, whether borrowing is the right option and whether they can afford to repay, even if their income were to drop.

For people in severe problem debt however, it’s even more difficult. They often face impossible choices, such as taking out more credit or going without essentials. They might feel like borrowing from friends and family is their best option — even their only option — to put food on the table or heat their home. Friends and family loans can be beneficial and can be better for people than other types of credit, but in this situation they could also benefit from free debt advice.

If anyone feels they need help, or are worried about their debts, we‘d urge them to get free debt advice as soon as possible. We’re here to help.

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