IT HAS ALWAYS been common to lend small amounts of money to friends and family members on an informal basis writes Simon Porter (pictured), senior associate – company and commercial at Neves Solicitors. However, increasing numbers of people are taking larger loans from friends and family members.
These larger loans have pitfalls for the unwary, so it is critical that you take expert advice, so you are aware of the implications before committing to any loan.
Key factors you need to consider:
- Can you afford to make the loan? Consider possible changes in your circumstances – would lending the money leave you enough of a buffer? Think about the consequences to your personal relationship with the borrower.
- Can the borrower afford the loan? Will they be able to repay it within a timeframe that you are happy with? Sometimes, the ‘borrower’ is looking for a gift and has no real intention of repaying the money, so it is essential to be clear on this. You might decide that you want to make a gift (perhaps of a smaller amount) but both parties should be aware of the decision to make a gift and why.
It is possible that your loan may be regulated by the consumer credit rules of the Financial Conduct Authority (FCA). If it falls under the FCA regulations, there is a risk that any loan agreement may be unenforceable. Exemptions are available but these should be checked. A written loan agreement should be considered so that both you and the borrower are fully aware of the terms and repayment. For example, a written loan agreement trumps any misunderstanding by the borrower that a gift was intended in the event of a repayment issue.
If the security is over land, tread very carefully and take advice as it is possible that your loan could be subject to separate FCA rules on regulated mortgage contracts.
Consider charging interest to recoup lost earnings on the money loaned. Charging interest will also discourage the borrower from viewing the loan as a gift. If you do charge interest, it is taxable income in the eyes of HMRC.
If the borrower does not repay in accordance with the terms of the agreement, establish what the problem is and whether it can be resolved. You may wish to vary the terms in the initial agreement (to give them more time to repay, for example). If the agreement has been breached and you want to take legal action to get your money back, you will need to seek legal advice.
If you are considering making a loan and want to speak with a specialist lawyer, contact Simon Porter in the Neves commercial team.