Context
People experiencing mental health problems can face a combination of low or fluctuating income, additional expenses and problems managing money, which can increase reliance on credit as a way to make ends meet. However, a poor credit history, complicated applications processes and the high interest and charges can put affordable mainstream credit out of reach for some.
This report explores what happens when people experiencing mental health problems borrow informally from friends, family and acquaintances rather than licensed lenders, and considers how best they can be protected from potentially negative consequences.
The study
The research sought to explore:
- whether people with mental health problems are more likely to borrow informally
- what happens when people experiencing mental health problems borrow from friends, family and acquaintances
- how the borrower and lender can be protected.
The methodology for this project comprised:
- a review of the academic and grey literature around informal borrowing and illegal moneylending
- data analysis from wave 4 (2012-13) of Understanding Society, a UK-wide longitudinal survey of over 40,000 households. Analysis was based on two key variables: reported mental distress and reported debt to a private individual
- primary research with members of Money and Mental Health’s Research Community who have lived experience of mental health problems. This included a survey (n=422), focus groups with eight people, and two depth interviews.
Key findings
Prevalence of the issue:
- The analysis indicated that people experiencing mental health problems are one and a half times more likely to borrow informally as people not experiencing poor mental health (1.8% vs 1.2% of the adult population).
- A third (31%) of people borrowing informally are experiencing mental health problems - compared to 23% of the population as a whole. This suggests that in 2012, there were over 200,000 people who were experiencing mental health problems while in debt to family or friends.
- However, these may be underestimates due to people not reporting ‘informal lending’.
Reasons to borrow:
- ‘Push’ factors driving people towards informal credit included: poor credit records (58%) and difficulties navigating application processes.
- ‘Pull’ factors encouraging people to borrow informally included: the speed (40%), flexibility and affordability of loans from family and friends, and proactive offers of loans when friends and family see a person is struggling financially (32%, n=328).
Nature of borrowing:
- The majority (88%) of survey participants had borrowed from a family member, and half (49%) had borrowed from a close friend. Around one in six (16%) had borrowed from another private individual, for example a neighbour, friend of a friend or a loan shark (n=389).
- The most common agreement was to repay the principal sum without any interest, particularly for those borrowing from family (56%) and close friends (69%) (n=332).
- Some respondents reported difficulties with memory or cognition, and emotional strain associated with mental health conditions that can make it hard for borrowers to understand the agreements they’d made.
Impact of borrowing:
- Informal borrowing was viewed positively by some respondents. These respondents described helpful interventions by family and friends preventing a financial crisis, providing a welcome safety net and building a sense of social connection.
- Borrowing terms could be volatile, with some respondents highlighting that the terms changed during the agreement, with repayments increasing or being demanded suddenly. Even where the repayment terms were clear, some people found themselves agreeing to more than they could afford.
- Nearly half of those surveyed said informal borrowing strained or broke their relationship with the lender. The pressure and difficulty of repaying often took a toll on people’s mental health, with people reporting feeling ashamed, guilty, worried and scared.
- People experiencing mental health problems often find it difficult to engage with advice services and seek help when they are facing financial difficulties. In this study, 25% spoke to a friend or family member; 15% spoke to the lender; 12% sought advice from a charity; 2% reported lenders to an authority but 64% took none of these actions.
The authors made several key recommendations:
- For guidance bodies and relevant charities to establish clear, easily accessible guidance about what good informal borrowing looks like, to empower consumers to make agreements that are successful for both lender and borrower, including for people experiencing mental health problems, who may feel ashamed and guilty about their need to borrow.
- The money advice sector should consider treating informal borrowing differently to other non-priority debts, to ensure the social consequences of non-payment are considered in any proposed debt solution.
- For policy makers, to support alternative lending provision to people in financial difficulty, including the extension of the existing provision of Universal Credit (UC) Budgeting Advances (interest-free loans to cover the waiting period before first payment).
Points to consider
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Methodological strengths/weaknesses: The large sample size, reference to other studies, and data weighting give confidence in the robustness of the statistical analysis. There is however no discussion of correlation in the methodological appendix.
- The time elapsed since data collection (2012-13) would make it prudent to check if more recent analysis of these variables has taken place.
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Generalisability/ transferability: Many of the findings are relevant beyond their UK context, except for the recommendation to policy makers around the use of Universal Credit Budgeting Advances.
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Relevance: The study presents important insight into the reasons and issues associated with informal borrowing for those affected by mental ill-health.
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Applicability: The research is most applicable to anyone with an interest in the issue of informal borrowing and mental health.
