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What is a fair interest rate for lending money to a friend?

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USPublished 6 October 2026 · Written by BuyMeWhiskey Editorial Team · How we check facts

There is no single “fair” rate for a personal loan to a friend. The sensible rate reflects the borrower’s ability to repay, the risk you are taking and what both of you agree in writing. Keep the arrangement affordable and separate it from emotional pressure.

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Use MoneyHelper’s guidance on borrowing or lending to friends before agreeing the loan terms.

Read MoneyHelper’s lending guidance

Run your own numbers: Loan repayment (EMI) and amortization calculator.

What makes an interest rate fair between friends?

A private loan does not have to copy a bank’s rate. The “fair” rate is the one you both understand and can live with after considering the loan size, term, repayment schedule and risk of non-payment. MoneyHelper recommends putting the agreement in writing and keeping repayment records because money and friendships can become difficult to separate.

The most important question for the lender is not “How much interest can I charge?” but “Can I afford to lose this money?” For the borrower, the test is whether the repayment is affordable without creating another debt problem.

Should you compare the rate with other loans?

Yes, but use the comparison as a reference rather than a compulsory target. A friend may offer flexible terms, no application fee and a longer repayment period. A formal lender may charge more but provides a structured credit agreement and established servicing.

It can help to look at the total amount repaid, not just the headline rate. A low rate spread over a long period can still create a meaningful interest bill, while a higher rate over a short period may cost less overall. State the rate, period and repayment dates in plain English.

What should a friendship loan agreement include?

Original amount borrowed.
Interest rate and whether it is fixed.
Repayment dates and amount of each payment.
What happens if a payment is late.
Whether the borrower can repay early without a penalty.
How changes to the arrangement will be agreed.
Bank-transfer references or another repayment record.

MoneyHelper specifically recommends putting an agreement in writing and keeping records of repayments. This is not about distrusting your friend; it removes uncertainty. Both people can see the same balance and the same timetable.

What if you are asked to cosign instead?

Cosigning is not the same as lending your friend cash. You are taking on a legal obligation to the lender if the borrower fails to meet the agreement. Before agreeing, consider whether you could afford the repayments yourself and what would happen if the relationship changed.

If a friend is already struggling with debt, taking out a new loan to repay their existing credit-card balance can simply move the debt rather than solve the affordability problem. MoneyHelper advises borrowers to prioritise serious household bills and avoid borrowing from elsewhere just to keep up with repayments under pressure.

Is interest received from a friend taxable?

The tax answer depends on where you are resident and how the lending activity is treated. In the UK, interest income can be taxable, with the rules depending on your overall income and available allowances. HMRC’s savings-interest guidance confirms that interest received can be taxable and that the tax treatment depends on income and allowances.

For an Indian resident, the Income Tax Department’s current guidance places interest income within “Income from Other Sources” when it is not taxed under another head. So “it is only a friend loan” does not by itself answer the tax question.

What if your friend cannot repay?

Do not wait until the balance becomes impossible to track. Agree a revised schedule in writing, record what has been paid, and decide whether the lender can afford the delay. If the loan is becoming part of a wider debt problem, free debt help such as MoneyHelper, StepChange or National Debtline can help the borrower review their wider finances.

How do you protect the friendship?

Keep the conversation commercial even though the relationship is personal. Never lend money that you need for rent, bills, an emergency fund or another essential commitment. Decide in advance what you will do if repayment is late. A clear agreement is often kinder than an informal promise because neither person has to remember different versions of the deal.

The best friendship loan is one where the borrower has a realistic repayment plan and the lender could cope if the money were delayed or never recovered.

Worked example

Illustrative loan: suppose a friend borrows £2,000 for one year at an illustrative fixed rate of 5%. This is an example rate only; it is not a recommended or legally prescribed rate.

Illustrative interest: £2,000 × 5% = £100.
Illustrative total repayment: £2,000 + £100 = £2,100.

Before agreeing, the two friends should write down whether the £2,100 is repaid monthly, in one final payment, or under another schedule. They should also record what happens if a payment is late. The point of the example is to show the difference between the amount borrowed and the total owed, not to suggest that 5% is the right rate for every friendship loan.

They should also keep a simple running record of each repayment so the outstanding balance is never disputed.

What interest rate should I charge a friend on a personal loan?#

There is no universal fair rate. Start with affordability and risk, then compare the total cost with formal borrowing options. The agreement should state the rate and repayment schedule clearly. A rate that looks generous on paper is not useful if the borrower cannot afford the payments.

Should I lend my friend £2,000?#

Only if you could afford the money to be delayed or lost without putting yourself in financial difficulty. MoneyHelper recommends considering whether you can afford to lose the amount and whether the borrower can realistically repay it. Put a significant loan in writing and keep repayment records.

Is interest I receive from a friend taxable in the UK?#

Interest income can be taxable in the UK. HMRC says the tax depends on how much interest you earn, your other taxable income and your available allowances. The safest approach is to record the interest received and check your position rather than treating private lending as automatically tax-free.

Is a loan from a friend taxable in India?#

The loan principal is not automatically the same thing as taxable income simply because it is received. Interest received can fall under “Income from Other Sources” under India’s income-tax rules. The exact tax treatment depends on the arrangement and the taxpayer, so keep the loan agreement and interest records.

What if I cosigned for a friend who stopped paying?#

Cosigning creates an obligation to the lender, not just a promise between friends. If the borrower stops paying, the lender can pursue the contractual remedies that apply to the agreement. Do not ignore notices. Review the loan documents and consider independent debt or legal guidance if the amount is substantial.

Should a friend loan be in writing?#

Yes, especially for a meaningful amount. Write down the principal, interest, repayment dates, late-payment treatment and how changes will be agreed. MoneyHelper recommends a written agreement and repayment records. The document protects both people by removing arguments over what was originally promised.

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Next question →How should I handle a Direct Debit I want to stop?

Sources

Figures were checked against these sources before publication. If a rule changes, we update the page and show the new date.

General information, not personal financial advice. Rules depend on your circumstances; check the official source or speak to a regulated adviser before acting.

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