Mental health issues and bad borrowing decisions: a vicious circle?

Financial News

One in six of us will experience common mental health issues, like anxiety or depression. Unfortunately, as many as half of the people who have symptoms of these illnesses will go untreated (Source: Mental Health Foundation). Indeed, it is highly likely that you know people who are facing mental health problems, even if you do not have them yourself.

How are you affected?

You might be wondering what that has to do with your money and personal finance. According to Money and Mental Health, people suffering from mental health conditions could be 1.5 times more likely to avoid traditional methods of borrowing. Instead, they are much more inclined to turn to family, friends and, most dangerously, strangers, for unsecured loans.

Why do you need to know this? There are three ways to look at it:

  1. If you have thought about borrowing money on an informal basis yourself
  2. If you know someone who is struggling and may be tempted to turn to unsecured loans from unofficial sources
  3. If someone has turned to you for an informal loan and you are unsure whether you should lend them the money

Remember, difficult times, whether linked to mental health issues or not, can affect anyone. From family members to work colleagues, anyone can be affected by this, so it is worth knowing what to do, should you need to help someone, or seek help for yourself.

The difference between formal and informal borrowing

Formal borrowing encompasses loans and credit from regulated bodies, such as banks and building societies. Meanwhile, informal borrowing is unregulated and usually takes place between two individuals.

Being regulated means that the arrangement is governed by terms which state the protections in place covering both the borrower and the lender, including reparations for non-payment. However, with informal lending, even though terms may be stated, it can be hard to rely on them.

Informal borrowing has a higher level of risk than formal borrowing, due to a lack of regulation and security. The level of risk involved will differ significantly depending on who is involved. For example, borrowing money from your Nan is different to approaching the local loan shark.

Although you may not think of them as ‘lenders’, the bank of mum and dad, grandparents and other family members are involved in 88% of informal loan arrangements. 49% of arrangements involve friends and acquaintances.

Straying away from friends and family, ‘other private lenders’ are involved in 16% of informal loan arrangements. These lenders include neighbours, colleagues and more shady connections, such as loan sharks.

Why do people turn to informal borrowing?

Turning to other people to borrow money is not always a result of mental health issues. However, in some cases, formal lending may be too daunting a process. That could be due to the perceived stress of the situation, which could worsen the symptoms of mental health problems. However, it is also possible that the effects of past borrowing decisions could mean that formal methods of borrowing are no longer easily accessible.

What to do if you are affected

Whether this affects you, or someone you know, it is vital to gain a deeper insight into the root cause and reasons behind turning to informal borrowing. Before committing to anything, consider, or discuss, the following points:

Amount needed: Possibly the most obvious question is; how much money are we talking about? There’s a big difference between needing £10 until payday and asking for a few thousand to get out of debt.

Reason for loan: It is important to acknowledge where the money will be going, whichever side of the agreement you are on, the lender is likely to want to retain some control over the way the money is used.

Repayment: Discussing how the money will be repaid gives both parties an idea of the expectations in place. This also shows the lender that the money is intended as a loan, not a gift. It is worth having these agreements put into writing and signed by both parties.

Why informal: Accessing formal credit isn’t necessarily out of reach, it may simply be a case of needing support through the process and believing that borrowing from friends and family is easier than talking to lenders. By discussing the underlying issues, both parties know what is happening and alternate arrangements can be made, where suitable.

Getting help

Remember that money problems are usually a symptom of an issue, rather than the cause itself. If you, or someone you know is having problems, financially or with the effects of mental health problems, please talk to a relevant organisation:

To talk about any of these issues, free to get in touch with Bev or Sarah on 0115 933 4833.