Lending between friends and family is common practice for Canadians, but a new poll finds that mixing money and relationships can be risky business.

While more than six-in-10 Canadians (64%) have loaned or borrowed more than $500 from friends or family, more than a quarter (26%) report that the loans were not fully repaid, the poll sponsored by Investors Group reveals.

One-third (31%) of those who agreed to lend money felt pressured to do so. The majority of those who experienced the greatest feeling of pressure when asked to loan money (54%), did not get repaid at all.

“Everyone has the best intentions when it comes to helping out a loved one, especially if there’s an urgent need or an emergency. Some may give in to feelings of obligation against their better instincts,” says Debbie Ammeter, vp, Investors Group. “Family ties notwithstanding, unpaid loans can strain relationships and create stress.”

According to the survey, easier credit terms including no interest charges and less demanding payment schedules were the primary reasons why Canadians chose to approach family members or friends for a loan.

Half of respondents said they approached a friend or family member rather than a lending institution because they would either pay no interest or less interest on the loan. More than a quarter (27%) chose personal lending because the repayment terms were more flexible. But for 13%, family and friends were their only available source of cash as they would have been unable to obtain credit elsewhere.

The survey also found that 83% Canadians who had loaned or borrowed funds from someone in their personal circle did so without a written agreement. Further, the survey found that only 23% of borrowers paid interest on their loans.

“Separating ‘business’ arrangements from personal matters may seem uncomfortable to both lender and borrower, especially if the situation doesn’t seem formal,” says Ammeter. “But loaning money to a loved one doesn’t preclude asking for specific loan conditions or a pay-back plan and can reduce the potential for disagreements and long-term future rifts.”

The majority of loans between friends or family were for moderate amounts, with 67% borrowing between $500 and $5,000 and 14% borrowing between $5,000 and $10,000. Fifteen per cent borrowed more than $10,000.

For both lenders and borrowers, top loan purposes were financial emergencies (25%), big-ticket purchases (15%), education (13%) and a home down payment (11%). Lesser priorities were house repairs (7%), starting a business (5%), taking a vacation (5%) or other big event (3%).

“Anyone can find themselves in a situation when they need a helping hand, and turning to those closest to us is natural,” says Ammeter. “Having a formal agreement and plan in place when securing a personal loan, won’t test the ties that bind.”

A total of 2,002 surveys were completed with Canadian adults between Sept. 18 and Sept. 24 2008, using the Harris/Decima eVox online panel.

IE