A personal loan agreement is a formal written agreement between one individual lending money to another.
You might use one in the following situations:
- A parent loaning money to a child to help them with a house deposit
- A grandparent loaning money to a grandchild to help them pay for a wedding
- A friend loaning money to another friend to help them with mortgage repayments
- A brother lending money to his sister to cover unexpected veterinary bills
It’s an agreement that the recipient of the money will pay back the lender.
Can you repay in lump sum or instalments?
Repayment terms are entirely up to you and the other person. You can agree to pay in a lump sum on a certain date, or (more commonly) you can agree that the money will be paid back in instalments over a certain period of time. When a house is involved you may decide repayment should be when that property is sold or within a certain number of years, whichever happens first.
We set out a clear schedule of repayments in the loan agreement so that all parties are aware of which payments are due when.
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Should you charge interest on the repayments?
Including interest in a loan agreement can cause it be subject to consumer credit regulations. This in turn puts significant obligations on the lender to remain compliant and the agreement enforceable.
As a rule we advise against charging interest in a loan agreement between friends and family. We can't help draft personal loan agreements where the parties want to charge significant interest.
You should also bear in mind that any interest that you receive on the loan will be considered to be taxable income, which you have to declare to the HMRC on a self-assessment tax return.
Secured or unsecured loans
You can make a secured, or an unsecured loan. A secured loan is backed by an asset, so if the borrower misses a repayment, then you have a right to possess the asset. It’s like a guarantee.
There’s no such ‘jeopardy’ with an unsecured loan. You’ll have a legal right to the repayments, but not to any additional property or assets linked to the loan.
Secured loans are usually used for larger loans, and unsecured loans are often preferred for smaller amounts.
You might use a secured loan if you’re lending money to somebody for a house deposit or pay off their mortgage. To do this, you take a charge over the property, which will usually be registered at the Land Registry. If your loan is not repaid before the property is sold, then you can be repaid out of the sale proceeds.
Some lenders however may refuse to grant a mortgage to the applicant if there’s a secured loan in place. They may refuse the mortgage application, or require that the loan is given on an unsecured basis.
A solicitor can help you with this so that you don’t fall into any unintended pitfalls.
How a solicitor can help
We appreciate that it might feel overly formal to draw up a loan agreement between friends and family. But it doesn’t have to be awkward.
You can just start with a simple questionnaire, and then we can guide you through the process, without it feeling clinical and corporate.
With a solicitor on board, you can make sure that the agreement is legally binding and enforceable. It will be unambiguous so all parties know what’s expected of them. You avoid any unintended consequences or potential regulatory pitfalls. And having a neutral third party draw up the agreement for you can take away any awkwardness you may feel about lending money to a loved one.
