Lending money to family or friends can be a delicate, but not uncommon, situation.

A recent study on the money habits of UK adults revealed a significant proportion still rely on the 'Bank of Mum & Dad' where their parents regularly provide financial support in times of need. The results showed that some people required support for day-to-day living costs such as utilities, groceries and credit card bills. While other popular reasons were to fund large purchases like weddings, home renovations or vehicles.

While you might want to financially help a family member or friend, it's crucial to take a formal approach to the transaction to protect both parties.

We are a firm of solicitors that advise and draft personal loan agreements between individuals, and so wanted to share some considerations that may help you navigate the process of lending money and minimising the potential risks involve.
​

Begin with a conversation with the borrower to understand their current financial situation and the reason for the loan. Don't be afraid to ask specifics of why they need the amount along with how and when they foresee that they will be able to pay it back.

If the borrower isn't clear on these points, then you might want to give them some time to consider further and get back to you with the details. As vague promises of repayment 'one day' or when they are 'back on their feet' won't be useful for either party.

You should also be transparent about your own financial capacity and expectations. Specifically, how much you are willing to loan and that while you may be able to afford to lend this amount, you can't afford to lose it. Consequently, this is why you will require them to sign a legally binding loan agreement.

If either party are uncomfortable with committing to a written contract, it might be best to explore alternative solutions to help.

The goal of these informal conversations is to gain an understanding of each other's position and both be comfortable moving forward to formalise the points discussed.
​

Verbal agreements are unreliable. A written contract that documents the terms of the arrangement that is signed by both parties should be used. This not only provides evidence of the loan but also removes any ambiguity regarding what has been previously agreed.

The written contract should document all aspects of the loan and repayments, including what happens in the event of a default (non-payment). Some of the major clauses in a loan agreement typically include:

• Full names and addresses of the lender and borrower
• The exact amount to be lent and when this will be provided
• Any interest that the loan will attract (further points to consider below)
• A repayment schedule or the date when the loan will be paid back in full
• Consequences of late or missed payments and what constitutes a default on the loan

If your discussions with the borrower haven't gone into this amount of detail, then now is the time to confirm these points. After this both parties should then be ready to have the terms of the loan documented and signed.

It's at this point that you should consider instructing a solicitor to draft a formal loan agreement based on the terms agreed.

You do have the option of drafting a document yourself or using a generic template loan agreement from the Internet. As generally any written document that details the terms is better than none.

However having a bespoke loan agreement drafted by a solicitor, that is based on your requirements and legally addresses all necessary points is strongly advisable.
​

Charging interest on a loan to a friend or family member can be a grey area. Many lenders don't even think about charging interest when the loan is to help someone that they know, but it's something that you should seriously consider.

Lending a significant sum comes at a cost and risk to a lender. The cost is what you will lose not having the money in your own savings account earning interest. The risk is always that you may not be repaid in full by the borrower.

Therefore, you may wish to consider charging the borrower a fair rate of interest on the loan similar to what you would earn keeping the amount in a (risk free) savings account. This rate will certainly be less than a commercial lender would charge the borrower, so there are still clear advantages for them.

The final benefit on charging interest is on a legal point. As when a lender requires interest on a loan, the borrower and the Court, are unlikely to consider the amount being provided as a gift.
​

Lending money to someone close to you requires careful consideration and a professional approach.

As a lender you shouldn't be rushed into loaning money without clear terms being agreed, as you need to protect both your financial interests and your relationship.

A solicitor drafted loan agreement can provide this crucial protection and clarity. Allowing you to financially help the person in need while minimising the risks involved.
​

In business many people struggle when asked to review a contract or an agreement that has been presented to them. After all when finalising a deal or new business relationship, you are more likely to be focusing on the logistics and implementation of the actual deal than the wording of the contract.

However quickly glancing at a contract and just signing it to 'get the ball rolling' should be done at your peril.

Getting professional legal help with the document is your safest option, but if you're in the early stages of going through an agreement we wanted to share a few contract review tips on how to read a contract like a lawyer.
​

A contract is simply a written agreement between two or more parties to do (or not to do) a particular action. When correctly drafted and signed, a contract becomes a legally binding agreement that both parties must comply with.

The most important aspect of any contract is to precisely articulate the arrangement that has been agreed between the parties, ensuring it is in line with current law and legislation.

The remainder of the contract should then document how any foreseeable scenarios will be dealt with for the duration of the agreement. Such as implementation, timings, payment, failures, amendments, disputes and termination.

With this in mind it's time to begin the process of a detailed read through to understand the key clauses and look for anything that’s ambiguous or absent.
​

The major terminology or wording used should be specifically defined, either in the body of the contract or in the case of a lengthy document in a dedicated 'Definitions' section. Disputes often arise if a term isn't clearly documented and is just left for each party to interpret. For example, common terms such as:

• 'services' - Are the specific services the agreement covers clearly defined and agreed between the parties?
• 'reasonable period' – Could this be considered to be a day, a month, a year?
• 'tax' – Does this include import duties and value added tax (VAT)?
• 'price' – Is it the price net of VAT, gross price, the recommended retail price (RRP) etc?

​

The individuals or businesses that are entering into the agreement should be clearly defined. If only the name of a business or individual is documented, it may be considered ambiguous should you ever need to enforce the contract.

In the case of a limited company make sure their registered office and company number is recorded which precisely identifies them. With individuals detail their trading name (if a sole trader), address and date of birth.
​

The duration that an agreement covers or remains in force is an important clause to consider. While the parties may not want to be bound to an arrangement forever, they also may not want to be entering into a new contract every few months. Therefore, each party needs to consider what is a reasonable period for the contract to cover and how any extension or termination is dealt with.

• When does the agreement start and when will it end?
• Is there an initial or minimum contract length and then a provision for an automatic renewal or extension?
• Can either party terminate the contract? When can this occur, what is the notification process and what are valid reasons to terminate? Is this fair to both parties?

​

Indemnity is when a party agrees to protect and compensate another party from losses that may occur in the event of a specific breach or negligence. For example, a retailer may seek indemnity from a manufacturer in the event the products supplied are defective and a claim is made against them by a consumer.

A limitation of liability clause is used to restrict the amount a party pays in the event another party suffers a loss due to the contract. Without this term, a party may be liable for an unlimited amount of damages and financial compensation.

Both these clauses require careful and clear drafting if they are to successfully manage the risks posed by a contract whilst not impacting a party's statutory rights.
​

There's little point in carefully drafting a legal document without specifying the law and jurisdiction under which it falls.

You may think this is only important when dealing with international agreements, however this isn't the case. The UK alone has three legal jurisdictions (England and Wales, Scotland and Northern Ireland) each of which has their own distinct legislation.

A contract should clearly define which legal system it operates under and the court any dispute will be handled in. On the subject of disputes, court action should always be a last resort, so it is also worthwhile to consider dispute resolution options as part of the agreement.

A simple alternative dispute resolution clause that requires all parties must first undertake negotiation or mediation in an attempt to resolve an issue can save both time and money should a disagreement ever arise.
​

If you are presented with a contract prepared by another party or their solicitors, there really is no substitute for getting your own independent legal advice on its content.

Likewise if you have been using the same contract or terms of business for several years, how confident are you that it still stands up to the latest legislation?

​Instructing a solicitor to review and advise on the contract should be seriously considered. Many will be able to offer a fixed fee service and by acting with your best interests in mind, tailor a review to focus on the risks you may be exposed to.

There are very few people or businesses that don't need to borrow money at some point.

Traditionally banks, building societies and credit unions would be the source of funds and the products they offered would require the borrower to agree to various terms and charges. However, this tradition is changing with borrowers frequently now looking towards family, friends and business partners as a loan source.

In fact Aviva's Family Finances Report found that loans from family members or friends had overtaken overdrafts as a source of debt held by 18 to 35 year olds.

Loaning money to someone in need can often be of great help to them. Especially if they are unable to gain credit elsewhere and it avoids them incurring high charges that are associated with payday or doorstep loans.

While you may trust the borrower, be able to afford to lend the money, and have every confidence that you'll be paid back, you should still formalise the arrangement with a written loan agreement.

Most loans between family, friends and even business acquaintances are made informally and without anything in writing. While this is less than ideal from a legal standpoint, it doesn't necessarily mean that you have no legal options should a debtor decide not to pay you back (see our guide on being owed money without a contract or agreement).

But having something in writing is almost always better than having nothing, so drawing up a loan agreement is the way to go.

A loan agreement doesn't have to be a lengthy or overly complex document but having down on paper what the lender and borrower have agreed will provide protection should the worst happen and the borrower defaults (doesn't pay back) on the loan.

A starting point in creating a loan contract is to first have an open and frank discussion with the borrower about how and when you want to be paid back. There's little point in dictating a payment schedule that's unachievable from the outset and both parties need to be comfortable with any arrangement. For example, you may consider:

• If the loan is to start a business, when is the business expected to be profitable to start paying back the loan?
• If a loan is to pay debts or bills, what is currently being paid off per month and how much can realistically be afforded?
• If a loan is to make a purchase, will it be shared or used by another person? Should they also be added as a borrower and responsible for the repayment?
• Are there any other loans, mortgages or agreements that both parties need to be aware of?

​
When you've agreed the amount, how repayments are to be made and the length of the loan, you then need to discuss what happens if things go wrong. Can the borrower accept the potential legal consequences and costs if they can't make the repayments?

If at any point you are struggling to find common ground on what the contract should contain, you may need to reconsider lending the money at all. As differing positions at the outset could be an early sign of a potential dispute.

However, if all terms and conditions have been agreed it is time to get them down on paper, ensuring some key legal clauses are included.

At this junction it's also worth considering if you should seek legal advice from a solicitor who can take your agreed instructions and professionally draft the document for you.
​

​
​Parties Involved
At the very start of the agreement you should record the full name, address and contact details of the lender and the borrower. If there are multiple lenders and borrowers, all these should be detailed.

Key Dates
Record the key dates of the transaction, including when the money lending agreement comes into force and when the loan amount is to be transferred.

Amount to be Loaned
Clearly specify the amount that is being loaned, and to avoid any doubt or potential for error also record the amount in words as you would on a cheque. I.e.

£9,980.50 (nine thousand, nine hundred and eighty pounds and fifty pence)

Term of Loan
Define a period that the amount is being loaned over and when it needs to be paid back by. Even if you don't have a specific date or timeframe in mind, you should always specify a term (48 months) or a date (by 1 January 2023) when the loan should be fully paid back by.

Ideally this term needs to be no more than five and a half years from the date the loan is made to ensure that the debt doesn't become statute barred if you ever need to take legal action to recover your loan.
​

Governing Law
The agreement should specify what law and jurisdiction it comes under (e.g. English Law, England and Wales). This will be important should legal proceedings ever be required.

Signatures
The agreement must be signed by both parties and ideally witnessed by an independent person.
​

Once the agreement is drafted you should print two copies, sign them and each party keep one. Only when the agreement is signed should you then actually make the loan which ideally should be via cheque or bank transfer so that you have a record.
​
All this may seem a little daunting, especially if your loan involves a significant amount or you are unfamiliar with the best way to execute the transaction. So if you are in any doubt, consider instructing a solicitor to draft your loan agreement to protect your position and provide piece of mind. 
​