How making the wrong borrowing decisions can affect mental health

Posted on by Keith Roseburgh

Common mental health issues, such as anxiety and depression, affect one in six UK adults. In addition, 35-50% of those with severe mental health problems are untreated. (Source: Mental Health Foundation)

People who suffer from mental health problems are 1.5 times more likely to turn to family and friends for loans, than banks and building societies, according to a new report from Money and Mental Health. (Hover text: By clicking on one of these links you are departing from the regulatory site of Keith Roseburgh Financial. Neither Keith Roseburgh Financial nor Intrinsic is responsible for the accuracy of the information contained within the linked site.) But, what is the link and is informal borrowing more likely to lead to financial problems?

You might not feel like this affects you directly, but it might affect someone you know, or maybe you are the person they are asking for money from. Remember, mental health issues can affect anyone, your kids, your parents, even your friends, so knowing how to help those who need it could come in useful.

What is the difference between informal and formal borrowing?

While formal borrowing is carried out via a bank or building society, informal borrowing is the act of taking loans from unofficial sources, such as friends, family members and colleagues.

Formal borrowing has the advantages of being regulated, with terms and conditions stating what will happen if the borrower fails to make repayments as outlined in the agreement. However, informal borrowing includes asking friends, family and even strangers for money on an unsecured basis. The type of informal borrowing varies wildly, from asking parents for a small loan, to turning to loan sharks.

Who is most likely to lend informally?

Perhaps the most well-known informal lender is the bank of mum and dad. It can be hard for parents to turn family away when they ask for help, and that has led to parents and grandparents providing almost twice as many (88%) informal loans as close friends (49%).

‘Other private lenders’ make up 16% of informal borrowing, which could include anyone from neighbours to loan sharks, with one being evidently more dangerous to people facing mental health problems, than others.

Why turn to informal lenders?

Formal lenders will check the history of the borrower, who may fear that past indiscretions will make them ineligible for the help they need, making informal borrowing much more appealing. On top of this, informal lending often comes with added flexibility and lack of penalty for late repayments, which can be enticing to someone who is not in the right position to make legally binding agreements or stick to a regular payment schedule.

Those facing mental health issues may be in an unfortunate position because of their illness, and that could include having to leave work, having a lack of, or reduced income, and being unable to access credit through formal channels as a result.

How can informal lenders and borrowers better protect themselves?

If you are considering lending money to a friend or family member, or you know someone who is considering informal borrowing there are three key things to discuss:

  1. How much do they need to borrow? It can be tempting to access as much cash as possible when in a crisis but taking more than they need is likely to leave them in a worse position when they come to repay the debt.
  2. When and how will they repay it? Honesty is the best policy here, if they cannot afford to make repayments, they need to find another method of getting back on their feet.
  3. What will money be used for? Whether you are lending money or helping someone who is thinking about borrowing, knowing this will help to make sure they are not borrowing too much, or taking help unnecessarily.

If you are the person thinking about lending money to someone in your life who needs aid, you may wish to:

  • Formalise the agreement by getting the details in writing and both signing your agreement
  • Work with that person to get into a position where formal borrowing is a viable option for them
  • Remember that money alone will not fix what they are going through and that you may need to make alternative suggestions for places they can find help

What help is available?

If you, or someone you know needs help, the following resources might be helpful:

It is always difficult to manage your finances when medical problems arise. But whether they are mental or physical, financial advice and planning can make sure that you are on track to meet your financial goals and make the most of your situation – whatever that entails.

To talk to an adviser or planner about your finances, feel free to get in touch with us.

When I retired in May 2015, I approached Keith for guidance on pension planning as I had 5 pension policies that required to be merged into one pot. Keith gave good, clear and sensible advice in a professional and friendly manner; this was just what I needed to ensure that I had my future and that of my family safeguarded. Tom Dalkeith
An acquisition of capital through inheritance created a need for professional investment advice and management. After creating a suitable plan to suit my desired aspirations and risk level, over the past 18 years, Keith has constantly monitored the portfolio to my entire satisfaction, achieving the programme’s aims. Such conscientiousness and integrity have enabled me to recommend him to others who have been similarly satisfied. Mary Edinburgh
My wife and I were looking to arrange finance for a project. We wanted to know if it was possible to raise finance in the UK to buy a property in Spain. After hours of searching online, we settled on arranging a meeting with Keith. He was knowledgeable, friendly and helpful. Keith was able to recommend not only product which exceeded our budget expectations, but he was also able to put us in touch with a lawyer who could help to make it all happen. We now have our dream home in the sun thanks to Keith, and we have continued to rely on him ever since. Kenny Telfer BSc (Hons) MRICS
Keith has provided his services to me since I retired some years ago. I have much appreciated his knowledge and interpretation of what can sometimes be bewildering financial matters. In particular, his meticulous preparation and delivery of information in a clear and concise manner has been of great benefit in our deliberations. I would have no hesitation in recommending his services. Jim Pettigrew
Reaching the age of 55, I needed help to sort out my pension; I contacted Keith through Unbiased.co.uk for financial advice. Keith then came to see me and guided me in detail about my future, finances, savings, etc. I found Keith very informative. I had pensions in multiple pots, and he explained the best options for me. His knowledge and expertise guided me to make the correct decisions for my future. He dealt with everything with ease. Personally, I could not have done this process without him. He has helped me reduce my debt, increase my savings and I look forward to working with him to reduce my mortgage. Yvonne Scott
We approached Keith because we discovered that our investments were no longer being handled in the way we expected, we had various pensions too and a couple of frozen ones. Keith came up with a plan that suited us both and gave us a bit of cash to spend. His approach was both friendly and professional and took place at our home at a time that was convenient for us, I wouldn’t hesitate to recommend his professional advice and services. Graeme & Laura Ferguson

Request a callback

We'd love to hear from you, either call us on 0131 549 9555 or complete the form below