When someone whom you know personally is in need of money and you are in the position of being able to help them out financially, it may be very tempting as a generous friend or family member to offer this assistance. While definitely commendable, it is important to consider what happens if things don’t work out as planned.
Lending money to friends or family members is something which is fraught with potential issues (including possible tax consequences which are outside the scope of this article. Expert advice should be sought whenever lending money to ensure that there are no unforeseen tax consequences). Some people suggest that you should only lend money to friends or family in circumstances where you are prepared to accept that the money will never be returned and to essentially treat it as a gift. That way, if things do go wrong, then expectations have not been broken and the relationship can hopefully continue unaffected. However, especially when talking about large sums of money, this is not an approach which will be suitable for everyone. We must therefore consider what can be done to protect your position.
Loan Agreement for Lending Money to Family and Friends
Whenever someone lends money to another person, the principal concern should be getting the money back. It is therefore in everyone’s interest to document the terms of any loan in a formal agreement. This way, everyone knows exactly where they stand in respect of the loan. We would always advise that a Loan Agreement be entered into which sets out the amount of the loan and how it will be repaid so there can be no confusion over the terms which have been agreed. Other common terms include the rate of interest payable (if any), the duration of the loan, any covenants given by the borrower and events of default which set out circumstances where the lender can call in the loan.
However, where you are lending money to individuals, there are additional concerns to be aware of. Lending money to individuals is a highly regulated area by the Financial Conduct Authority (FCA) in order to ensure that individuals are sufficiently protected. There are, therefore, strict rules in place which govern these types of financial arrangements and quite often a lender in these situations must be a regulated body authorised by the FCA.
Getting authorisation from the FCA would be an extreme requirement in order to lend some money to a friend or family member and there are exceptions which fall outside the regulatory regime, including in circumstances where money is being lent to fund a house purchase and a mortgage is taken over the house as security which is something which happens frequently. It is important to ensure that proper legal advice is taken as there can be severe consequences if the financial regulatory regime is not followed correctly.
However you decide to structure the loan, putting in place a formal agreement helps to protect all the parties to the agreement and avoids arguments over exactly what both parties have agreed to.
If you are thinking of lending money to or borrowing money from family or friends, then please contact Michael Lam on firstname.lastname@example.org or on 0116 402 7240 to discuss formalising the arrangement.