In theory, you can write your own loan agreement, but we wouldn’t recommend this course of action. We would definitely advise against it if you’re loaning money in connection to a property.  For example, if you’re helping with a house deposit, providing a bridging loan or paying off someone else’s mortgage.

But if you’re making a loan for a smaller sum of money, and it’s not linked to property, then you could consider making a loan agreement yourself.

You’ll need to include clauses that cover:

-          Who is lending the money and who is borrowing it

-          The exact amount of money that comprises the loan

-          The purpose of the loan

-          How and when repayments will be made

-          Whether or not you are charging interest and how interest will be calculated

-          Whether the loan is secured against an asset

-          What happens if payment is late

-          What happens if the borrower can no longer repay the loan in full

Both parties need to sign and date the agreement.

You also need to make sure you don’t fall foul of consumer credit regulation.

Is it a good idea to write your own loan agreement?

As is the case with most things in life, just because you can do something, doesn’t necessarily mean that you should.

There are possible legal, and relational consequences of drafting your own loan agreement.

Legally, there are certain requirements to make the agreement legally binding. All the terms must clear, unambiguous, and fair. This sounds simple to do in theory, but actually it can be tricky to get it right. You may need to meet certain legal formalities. For example you might need to have your signatures witnessed.

On a relational level, it’s easier to agree terms that have been drafted by a neutral third party. You might find it easier to agree on things like repayment terms, if you can say that the solicitor recommended them.

Don’t draft your own loan agreement for a house deposit

Loans for house deposits are slightly different to other types of private loan.

In some circumstances, these loans are regulated by the Financial Conduct Authority. This means that the person lending the money would need to be approved to provide the loan. They would also have to meet lots of extra obligations regarding the loan.

Usually this is only the case if the loan is made “by way of business” which isn’t usually the case when you’re lending to a family member. But we need to make sure it’s drafted correctly to avoid being a regulated loan.

It may also be necessary to register the loan agreement with the Land Registry, and to present it to lenders to get a mortgage.

As well as navigating this registration process, the borrower will need to get independent legal advice on the terms of the loan.  The solicitor may refuse to provide that advice if the form of the agreement isn’t to a recognised standard.

The loan agreement must be enforceable for it to be accepted, and a solicitor will make sure that it’s legal binding and enforceable for you.

We can draft a loan agreement for you for a fixed fee of £295. Find out more about our Personal Loan Agreements here.