When a Favour Becomes a Loan: Keeping Money and Family on Speaking Terms
Lending money to someone you love is one of those things that feels simple at the time. They need a hand. You have a bit put by. Everyone is grateful, nobody wants a fuss, and the words 'don't worry about it' are floating around the kitchen. Then a year passes, the payments get patchy, and suddenly Sunday lunch has a seating plan.
At Alison's Legal, we're not here to tell you never to help. We're here to help you do it in a way that keeps the money and the relationship in one piece. That starts with being honest about what the arrangement actually is.
Is it a gift or a loan?
This is the first question, and it's amazing how often it gets left unanswered. If you hand over £2,000 and say 'that's a gift, I don't want it back', it's a gift. If you say 'pay me back when you can', it's probably a loan, even if you never write it down. The trouble with 'when you can' is that it means different things to different people. To you, it might mean after payday. To them, it might mean after the next car boot sale, a lottery win, or the heat death of the universe.
Before any money moves, say the quiet bit out loud: 'Is this a gift or a loan?' If it's a loan, agree the basics while everyone is still smiling.
Why a written agreement is not an insult
Some people worry that asking for a written agreement makes the whole thing feel cold. It doesn't have to. You can frame it as a helpful reminder for both of you: 'Let's write down what we've agreed so neither of us has to rely on memory.' That protects the borrower too. It stops a vague arrangement turning into a family legend where nobody can remember whether it was £3,000 or £4,500.
You don't usually need a solicitor for a straightforward family loan. A clear, signed document is often enough. For large sums, property, or anything involving a business, get proper advice before you sign.
What to put in a simple loan agreement
Keep it readable. A plain-English note is better than a ten-page document nobody understands. Include:
- the names of both people and the date
- the amount borrowed and what it's for
- whether it's a gift or a loan (if it's a loan, say so clearly)
- how and when it will be repaid
- whether interest is being charged (if not, say 'no interest')
- what happens if a payment is late
- both signatures
If you're lending a large amount, you might also agree what happens if the borrower wants to pay early, or whether anyone is guaranteeing the loan. Be careful about securing a loan against someone's home. That's a big step and needs legal advice.
Keep a paper trail
This is the unglamorous bit that saves friendships. Use a bank transfer rather than cash, and put 'loan for [name]' or 'loan repayment' in the reference. Keep the signed agreement, bank statements, and any messages where you discuss the money. If plans change, confirm the new arrangement by email or text. A casual 'just to confirm, we've agreed you'll pay £150 a month starting in April' is worth more than you'd think.
The limitation period bit (don't switch off)
In England and Wales, a simple contract debt usually has a limitation period of six years. In Scotland, it's generally five years. That doesn't mean you should wait six years and then pounce. It means you shouldn't assume a loan can sit ignored forever. If payments stop, deal with it sooner rather than later. In England and Wales, a written acknowledgment of the debt or a part-payment can restart the clock, but the rules are fiddly. If a lot of money is involved, get advice.
How to say no without becoming the villain
Sometimes the kindest answer is no. You might not be able to afford it, or you might know from experience that lending will change the relationship. Try:
'I'm not in a position to lend money at the moment without it affecting my own plans. I can help you look at your budget, though.'
Or:
'I don't lend to family anymore. It's nothing personal; I've learned it causes problems for me. I'm happy to help in other ways.'
You don't need to produce a spreadsheet of excuses. A clear, kind no is better than a resentful yes.
If they stop paying
Start with a conversation, not a solicitor's letter. Ask what's happened and whether a new payment plan would work. Put the agreement in writing: 'Following our chat, we've agreed you'll pay £100 on the first of each month from December.' If that fails, send a polite written reminder with a deadline. Keep copies. If the amount is within the small claims limit and the relationship has already cooled, you can use the small claims track. It's designed for people without lawyers, though it still takes time and admin.
The golden rule
Don't lend money you can't afford to lose. That sounds cynical, but it's practical. If the worst happens, you want to be annoyed about the money, not worried about your rent. A written agreement won't guarantee repayment, but it makes the expectations clear, gives you evidence if things go wrong, and stops a vague favour turning into a family feud.
Help where you can. Write it down. Say what you mean. And if you're going to be the bank, at least be a well-organised one.
