12 January 2023 by

Loans to friends or family – how to get it right

Who are the parties?

Usually, the only parties to a loan agreement are the borrower and the lender.  However, you may have multiple borrowers and multiple lenders. For example, mum and dad (the lenders) could be lending money to their adult child and their partner (the borrowers).

We have recently worked on a number of loan agreements where siblings are lending money to their elderly parents to assist in paying off their mortgage.  It is also common to have loan agreements between friends and acquaintances.

What is the purpose?

It’s not essential for the agreement to define how the borrower must use the loan.  However, it is quite common to do so and the reason for this is that it favours the lender.  If the agreement specifies a particular purpose for the loan but, for whatever reason, it becomes impossible to fulfil that purpose, then the borrower must repay the loan amount to the lender.

Loans can be made for general expenditure or can go towards a house deposit or to repay a mortgage.  Whatever your situation, we can assist in putting together the right document for you.

Amount of loan

There are no limits when it comes to the loan amount.  We would definitely recommend a written agreement for more substantial sums, so that both parties have a clear understanding of exactly what has been agreed.

Is interest payable on the loan?

Whether you are the lender or the borrower, you should be clear on whether the loan will accrue interest and, if so, how this will work.  When considering a suitable interest rate, the parties should consider (among other things) the rates that would be available to the borrower from other lenders, such as high street banks, and also the rate of inflation.

What is the loan repayment structure?

The repayment structure can differ based on the purpose of the loan.  We can assist in putting together the best structure for you.

Some loans have repayments due every month, every quarter, or every year. Others have a lump sum repayment on a particular date in the future.  In some loan agreements, the repayment date is based on a specific event, such as ‘the sale of the property’ or ‘the death of the borrower’.  This does not provide as much clarity as a defined date (as the event may not occur any time soon), and so we would usually recommend including a long-stop date for repayment.  This could be something like ‘on the earlier of 31 December 2023 or the sale of the property’.

Security

What can the lender do if the borrower fails to repay on time?  What if the borrower’s reason for not paying is that he/she simply doesn’t have the cash available at the time?

It is always safest for lenders to take some form of ‘security’.  The most common example of this is a legal charge registered against the borrower’s property.  When this type of security is involved, we assist with producing the legal charge and having it registered at the Land Registry.

At Bolt Burdon, we can assist in producing your loan agreement and any necessary security documentation.  Please feel free to reach out and we can discuss the best way to help you. If you have any questions relating to loan agreements or security arrangements, please contact our Corporate & Commercial team.

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