Quite often people will loan money to their family or friends.
Whether it's lending a tenner to a friend at the pub or helping a close relation with the deposit needed to buy their first home, loans between family members and friends are extremely common.
Unfortunately, so are disagreements about them. It could be later argued that there has not been a transfer of money at all, or that it was a gift.
Unpaid or disputed loans can negatively affect relationships and, sometimes, even cut ties forever. This is why it is important to protect money and keep any loan agreement made in ‘writing’.
Having such a thing as a loan agreement can save a lot of conflict. A loan agreement is a contract between a borrower and a lender physically evidencing the mutual promises made by each party.
Before entering into a loan agreement, the borrower must set out clear boundaries to the lender.
Before you make a loan ask yourself:
Can you afford to be without the money if the loan is not paid back?
If a loan is not paid back then this could potentially put you in a position of financial difficulty, depending on your individual circumstances. Will the person making the loan lose out on interest or other advantages of having it saved/invested?
Do you trust that the money will be paid back?
The whole point of loaning someone money is because you trust that the money will be paid back, however this is where the importance of having a ‘loan agreement in writing’ comes in as it outlines the agreement and acts as a written contract stating what the parties have agreed and the terms of repayment. It is also good to have any agreement in writing to prove that such an agreement existed, and evidence that you loaned money.
What could happen if the loan is not repaid?
If a loan is not repaid, especially on the terms have been agreed by the parties about how the loan is to be paid back, then this could potentially lead to a fall out or other conflict. Is it worth the risk?
Why is it important to record the loan in writing?
It is important to record the loan and state the fact that it is not ‘a gift’ you can set out the exact amount to be paid back and how it is to be paid back. That way you will all be clear if a payment term has been breached or missed. You can also state there will be a penalty if the agreement is not complied with.
Considering forms of security for the loan?
A secured loan is a loan which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.
It might be wise to consider forms of security for your loan for further protection. That way if there is a default you know you have an asset that you can claim against. For example, a charge on a property.
How can I make re-payments of the loan traceable?
Make payment of the loan by bank transfer or cheque. On the bank transfer itself you may wish to state within the reference ‘loan’. Receive all payments back by bank transfer and not cash. You should keep a written record of all payments that each party signs when each repayment is made.
Taylor Bracewell can draft loan agreements on your behalf.
If you would like more information loans or would like any other expert disputes advise, please do not hesitate to contact Emma Cornell, Head of Disputes Resolution, on 01302 965299 (Doncaster) or 0114 272 1884 (Sheffield). Alternatively you can email firstname.lastname@example.org