When lending money to friends, family, or acquaintances, it’s tempting to rely on a handshake or informal agreement. However, without a formal arrangement, misunderstandings or disputes can arise, potentially damaging relationships. That’s where a personal loan agreement comes in. It sets out clear terms, protecting both the lender and borrower. But while templates for loan agreements are readily available online and can be relatively cheap, they are not always good value for money or the best option for everyone. Let’s explore why.

What is a Personal Loan Agreement?

A personal loan agreement is a legal document outlining the terms of a loan between individuals. It specifies the amount borrowed, repayment terms, interest rates (if applicable), and what happens if the borrower fails to repay. It acts as a safety net for both parties by clearly defining expectations and responsibilities.

In England and Wales, a well-drafted loan agreement ensures compliance with legal regulations while avoiding unnecessary complications. It’s more than just a piece of paper; it’s a tool for financial clarity and peace of mind.

Do You Need an Agreement?

The short answer is: yes, in most cases. A loan agreement protects your interests and helps avoid disputes. However, there are a few considerations:

• Proportional Costs: Legal advice for drafting a loan agreement can cost around hundreds of pounds. We charge £295 to draft a personal loan agreement. Depending on what the loan is for, and particularly where property is involved, additional costs may also apply, such as registering charges for secured loans. Keep these expenses proportional to the loan’s value.

• Risk Assessment: If you’re willing to risk not having the money repaid, you might prefer gifting the money instead. In such cases, a loan agreement may not be necessary. However, if repayment matters, an agreement is essential.

Why Using a Template Loan Agreement is a Bad Idea

While template loan agreements may seem like a cost-effective solution, they often fall short of providing adequate protection. Here’s why:

1. Regulatory Compliance

Loan agreements in the UK must comply with various regulations. If poorly drafted, a template agreement could inadvertently breach laws, leading to significant consequences:

• Consumer Credit Regulation: Certain loans fall under the Consumer Credit Act. If your loan is not carefully drafted by someone familiar both with your circumstances and the consumer credit regulation, it could result in unintended obligations.  These consequences could include enforcement by the FCA leading to you, the lender, being held to be guilty of a criminal offence(!). In such circumstances the loan agreement may also be found to be unenforceable.

• Mortgage Regulation: If a property is involved, the agreement may fall under FCA regulations. This requires careful consideration, as regulatory breaches can have severe implications.

A solicitor ensures the agreement avoids these pitfalls by tailoring it to the specific circumstances of the loan.

2. Independent Legal Advice

If the loan is secured against property, the borrower will need independent legal advice. Solicitors reviewing the agreement to provide this advice will expect it to be properly drafted. Additionally, securing the loan involves registering a charge with HM Land Registry, often requiring a solicitor’s assistance. If you are going to need a lawyer to register your charge, you might as well instruct them to draw up the loan agreement as well.

3. Tailored Fit

Template agreements are generic. They don’t account for unique circumstances, such as:

• The relationship between the parties

• Repayment flexibility (lots of our clients are very relaxed on repayment terms, and off-the-shelf loan agreements don't usually account for this)

• the involvement of property

A solicitor can discuss these factors and create an agreement that reflects the parties’ intentions, reducing the risk of future disputes.

How a Solicitor Can Help

Solicitors bring expertise and precision to drafting loan agreements, offering peace of mind that templates cannot match. Here’s how they can assist:

1. Drafting a Compliant Agreement

Solicitors ensure your agreement complies with UK regulations, avoiding costly mistakes. They handle complex requirements, such as determining whether the loan falls under consumer credit or mortgage regulations.

2. Bespoke Solutions

Every loan is unique. A solicitor tailors the agreement to your needs, addressing specific repayment terms, interest rates, or security arrangements. This personalisation protects both parties and aligns with their expectations.

3. Added Value

A solicitor’s experience can bring significant value to your transaction.  They can advise on issues that often come up (like how to sign and witnessing requirements) to more unique points such as how broad or focused the wording of a term should be.

4. Registration of Any Charge

For secured loans involving property, solicitors manage the registration of charges with HM Land Registry. This formalises the loan and safeguards the lender’s interest in the property.

Final thoughts...

While a template loan agreement might seem like a quick and cheap solution, it often fails to provide the protection and precision needed for personal loans. The potential pitfalls - from regulatory breaches to generic terms - can outweigh any initial savings. Investing in a solicitor’s expertise ensures your loan agreement is compliant, bespoke, and fit for purpose. For loans involving property or significant sums, it’s a step worth taking to safeguard your financial interests.