Guest blog from one of our expert litigation solicitors, Clare Jones
“neither a borrower nor a lender be; for loan oft loses both itself and friend”
Shakespeare recognised that lending between friends and family has always been high risk – and never more so than now.
That being said, it’s natural at times like these to want to help family members and close friends who might be struggling financially through no fault of their own by lending money for a short period. However, the cost of getting things wrong may not just be an inability to recover money lent; it may also rupture relationships that may take years to mend.
Golden rules for maintaining relationships and protecting your money
Let’s take a look at the practical steps that you can take to protect both yourself and those to whom you are lending.
First steps when lending money to friends and family:
- Work out what you can afford to lend and when you need repayment.
- Work out with the borrower what they can (realistically) afford to repay and when.
If you reach an agreement, before any money is paid over:
- It’s a good idea to draw up a simple, short agreement which the lender and borrower sign. The signatures can be witnessed too, for added protection. Amongst other things, this makes it clear that the loan is just that – a loan – and not a gift (which therefore carries no repayment obligation). To avoid a dispute on such a fundamental point, state clearly that the loan is a loan
- The agreement should clearly state all the important terms of the agreement. For example, the amount of the loan, when repayments are made – and if in instalments, how much is each instalment?
- Is interest payable? If it is, set out the interest rate and how it accrues. When does interest become repayable: monthly, yearly or when the loan is repaid? As a practical point, arrange to meet the borrower annually to go through the calculation of accrued interest, so the borrower does not have an unpleasant surprise. Confirm the details of what was agreed at the meeting in an email. Separately, remember if you earn interest it may need to be declared for tax purposes.
- Who is the borrower? Is it one person or perhaps a person and their partner? Be clear.
- It’s also good idea to pay money by bank transfer (marked ‘loan’) or by cheque: this creates a paper trail. Similarly, repayments should be marked ‘repayment of loan’ so that there is no room for confusion.
- Borrower and lender should keep the signed agreement (or a copy) – keep it safe. Retain emails and other documents relating to the loan safe too.
- If the loan is really substantial, consider taking some form of security – the obvious example would be a charge over a property – to safeguard your ability to obtain repayment.
The aim is to be transparent, so that both lender and borrower are clear as to what their obligations are and so that there is no room for later disagreement.
Potential problems to consider when lending money:
- If the borrower has difficulty repaying, keep the channels of communication open. Negotiate, if possible, amended repayment terms. Write these changes down and both borrower and lender should sign these. Keep the email trail safe.
- Unfortunately, an occasion may arise whereby loans are not repaid. If the loan is under £5000, the Small Claims Court can be used to take action against the borrower. This is a ‘user friendly’ procedure and designed to be used by people who do not have legal qualifications. If a loan is over £5,000 consider speaking to a solicitor as the Small Claims Court procedure is likely not to be available. Other options include serving a statutory demand as a forerunner to a bankruptcy petition, but there may be reluctance to take this course where friends or family are involved.
If you are concerned about making a loan or repaying it, Labrums can advise on loans between friends and family by creating bespoke loan agreements. If, as sometimes happens and despite the best intentions, repayments are not made, we can also advise you on the steps you can take to recover money due to you through resolving personal disputes.
Give us a call to discuss your requirements and to obtain a fee quote.