Family loans on a low income

Borrowing from a parent, sibling, grandparent or close friend is often the cheapest credit available to someone on a low income. There is usually no interest, no credit check and no fee for paying early. Yet money between relatives can also strain relationships, especially when the lender is on a small budget too and the repayment plan was never clearly agreed.

This page covers how to ask, how to put a family loan in writing, what to watch for if you are the one lending, and how such arrangements interact with UK benefits. It also looks at the other side of "family loans": products such as guarantor loans that draw relatives into a commercial agreement.

When a family loan makes sense

A loan from someone you trust can be a sensible way to cover a one-off cost: a deposit for a new flat, a car repair that keeps you in work, a replacement fridge. It works best when:

• the amount is small compared with what the lender can afford to lose;
• you have a realistic way to repay, even slowly;
• both sides agree on what happens if circumstances change.

It is less suitable for covering a permanent shortfall in your monthly budget. If rent and food already take everything, borrowing from relatives only moves the gap to them. In that case, start with benefits, grants and free debt advice.

Check grants and advances first

Before asking someone close to you, check whether the cost can be met without any loan. Your council may run local crisis support for essential items. If you receive Universal Credit, a Budgeting Advance is interest-free. Energy suppliers and water companies often have hardship schemes, and charities give grants for specific needs such as school uniforms or household goods. Our page on one-off hardship grants explains where to look.

How to ask and agree the terms

Raising money with family is uncomfortable, and it helps to be specific. Explain what the money is for, the exact amount and how you plan to repay. Offer a plan rather than an open-ended promise. Then agree together on:

• the amount and the date it is paid;
• the repayment amount, frequency and method, such as a standing order on payday;
• whether any interest applies (usually none);
• what happens if you lose work or fall ill: a pause, a smaller payment, or a review date;
• whether the money is a loan or, in part, a gift.

Putting it in writing

A simple signed note protects both sides and avoids "I thought it was a gift" disputes later. Include both names, the date, the amount, the repayment schedule and what happens in case of difficulty. Keep a record of each repayment, ideally by bank transfer so there is a trail. For larger sums, such as a contribution to buying a home, take legal advice: a mortgage lender will usually ask whether family money is a gift or a loan, and the answer matters.

Being clear also helps if the person lending dies before you have repaid: their estate may treat the balance as a debt owed to it.

Family loans and UK benefits

Money lent to you by a relative can affect means-tested benefits in some situations. Under Universal Credit, capital you hold above certain limits reduces your award, so a large sum sitting in your account could matter until it is spent on the purpose intended. Regular payments from family may also need to be reported. If you are the lender and on benefits yourself, giving away money can raise questions if it looks like you are reducing your savings to qualify. Tell the Department for Work and Pensions about changes as required and, if unsure, ask a benefits adviser at Citizens Advice before the money moves.

If you are the one lending

Many relatives on modest incomes lend more than they can afford out of love or guilt. Only lend what you could live without if it is never repaid. Do not borrow yourself, use a credit card or take out a loan in your name to lend on: if the other person stops paying, the debt stays yours. It is fine to say no, or to offer help in another form, such as childcare, a lift to work or help preparing a budget.

Guarantor loans and joint credit: a different kind of family loan

Some lenders market "family" products in which a relative becomes your guarantor. If you miss payments, the lender can pursue the guarantor for the full balance, and the guarantor's credit file can be affected. Joint loans and joint accounts link your credit files too. These products are often expensive and have caused real hardship for guarantors. Before agreeing, both people should read the agreement, compare the APR and total amount repayable, and consider safer options such as a credit union loan. See our guide to not-for-profit lending.

Warning signs: scams using family trust

Fraudsters sometimes pose as relatives on messaging apps ("Hi Mum, I've lost my phone") and ask for urgent transfers. Always call the person on a number you already know before sending money. Be equally careful of strangers on social media who offer loans "like family", with "no paperwork", but then ask for an upfront fee: no genuine lender does this.

Checklist for a family loan

• Have I checked grants, advances and hardship funds first?
• Is the amount one the lender can afford to lose?
• Have we agreed the repayment amount, dates and method?
• Have we agreed what happens if I lose income?
• Is the agreement written down and signed by both of us?
• Do either of us need to tell the DWP about the money?
• Am I avoiding a guarantor or joint loan that puts my relative at risk?

If family help is not possible, other low-cost routes exist. Compare our pages on loans with no interest and community and solidarity lending.