When to borrow and when to lend

“Neither a borrower or a lender be” Polonius advised his son, but as wise as that advice may be, Polonius did not reckon what idiotic administrations could do and allow to make nonsense of that sage advice. There are circumstances when you can be a lender in which your borrower should never borrow, and cases where you might risk being a borrower but your counterpart should never lend to you.

I will take the second case first. These are the circumstances when your lending might well run up against difficulties which result in it being illegal to claim your money back. Things are not always as they seem. I am not talking about billions of Euros lent to Greece but ordinary matter of fact transactions that happen every day in England.

Imagine a fairly benign case. Mr Bloggs has a son, and being a young man in a hurry to surround himself with the possessions that young men enjoy he wishes to borrow from his father and his father, having an orderly mind and wanting to impress upon his son the need to keep his affairs in order, agrees to lend his son say £10,000. The son agrees to repay his father in three years time with interest (the father insisted) at 3% per annum. The three years passes and the son is due to repay the loan and the interest. Unfortunately by this time the son and father have fallen out, and the son wants to avoid repaying the loan. He takes legal advice and the solicitor explains that the loan might well be not repayable. It might be illegal.

You see, the state of English law on loans is not straightforward, mainly because so many European Union Directives have been imported into the law that expert lawyers find it hard to understand whether an arrangement like that between the father and son that I have described is actually legal. You can pore over volumes of laws and directives and still be unsure of the legality of the loan. If it is illegal the lender father cannot recover the loan from the borrower son. The father loses his money and the son has an ill merited windfall.

In that case if only the father had got a licence to lend money from the Office of Fair Trading all would have been well. But the father did not do this. He would not expect to do this (which ordinary sensible person would expect this?) and as a result if the son defends a lawsuit on the grounds that the loan was not compliant with legislation the son will succeed in giving his father a headache and may well succeed in getting off having to repay the loan. The father should not have lent and it turned out that the son did well to be a borrower.

Now for the other side of the coin. Imagine that someone needs a small loan; say £200, to tide them over until the next payday. While watching television he sees an advert for payday loans with three puppets representing elderly friendly people sitting on a sofa. That nice company will lend £200 for a few weeks. However the interest rate is not 3%, but 2412% (yes I will write it in words just to assure you that I have not mis-typed – two thousand four hundred and twelve per cent), and as such the borroer may easily find himself in a position where you cannot ever repay the interest on the loan, however many times you have repaid the capital.

The lender has, however, taken the precaution of registering with the Office of Fair Trading who has deemed the lender fit and proper notwithstanding the interest rate charged. The loan is enforceable and will have to be repaid. In this case it was economically good to be a lender and economically bad to be a borrower.

It is astonishing that any commercial nation with centuries of mercantile history from which it has been able to develop fair laws about lending and borrowing should find its citizens subject to the laws that I have described. It is more than astonishing; it is shameful.