How To Write A Loan Agreement Between Family or Friends

mariam-abu-hussein
Mariam Abu HusseinLegal Assessment Specialist @ Lawhive
Updated on 6th June 2024
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Lending money to family or friends is quite common, often born out of a desire to help those we care about. However, without a formal agreement, what starts as a generous gesture can sometimes end in misunderstandings and strained relationships. 

If you’re looking for guidance on how to write a personal loan agreement between family members or friends that protects both the lender and the borrower, you’ve come to the right place. This article is designed to help you understand the key components of a personal loan agreement and how to put one together in a fair and legally sound way. 

We’ll explain what a loan agreement is and why it’s good to have one, even when dealing with close family and friends. We’ll share the essential elements that need to be included and walk you through the step-by-step process of drafting, reviewing, and finalising your agreement.

Additionally, we’ll cover important legal considerations and offer tips on maintaining good relationships throughout the loan period. 

What is a loan agreement? 

A loan agreement is a written contract between a lender and a borrower. It states the amount of money being lent, the terms of repayment, and any other conditions related to the loan. Essentially, it clearly outlines what both parties agree to when the loan is made.

Why is a loan agreement important? 

Even when lending money to someone you trust, such as a family member or a friend, a loan agreement is important because it makes sure that both of you are clear on the loan terms, reducing the risk of misunderstandings and disputes. 

Further, if the borrower does fail to repay the loan, a written agreement provides legal protection and a basis for pursuing repayment through legal channels if necessary. 

Key parts of a loan agreement 

Loan agreements between family members or friends should include: 

  • Details of who is lending the money and who is borrowing it

  • The exact amount of money being lent

  • The purpose of the loan

  • How and when the loan will be repaid

  • If interest will be charged on the loan, the interest rate, and how it will be calculated 

  • If the loan is secured against an asset and the conditions under which the lender can claim it if the borrower defaults 

  • What makes a default on the loan and the consequences

Both parties should also sign and date the agreement. 

How to write a loan agreement between family or friends

Creating a loan agreement between family or friends might seem daunting, but it can be straightforward if you follow these steps. 

Gather information 

Before you start, gather all the necessary information such as personal details, loan amount, and repayment terms. 

At this point, you should also decide if you will charge interest and whether the loan is secured. All of this should be discussed collaboratively with your family member or friend before moving on to the next step. All parties should agree to the loan terms initially, before committing them to writing. This will make the process quicker and flag up any potential issues that may come about further down the line.

Draft the loan agreement 

You can either use a template, write the agreement from scratch, or ask a solicitor to draft a personal loan agreement for you. 

If you choose to draft your own agreement, it should include all the information you have gathered like the loan amount, repayment terms, interest rate, and default terms. 

Review the loan agreement 

Once drafted, you and the lender should review the agreement to make sure all details are correct and make any necessary revisions. 

In some cases, lenders may ask a solicitor to review the agreement to make sure they understand the terms and conditions.

Even if the loan agreement is between family members or friends, this is a good call to make sure everyone understands their rights and obligations under the agreement.

Sign and store the agreement 

Finally, both parties should sign the agreement and keep a copy for their records. This is important as you may need to revisit the agreement further down the line - and not just because a dispute arises! For example, in future, you may want to change the loan terms for certain reasons which we'll discuss later on in this article.

Should you charge interest on a personal loan to a friend or family member? 

Whether to charge interest on a personal loan to a friend or family member can be a tricky decision. It involves balancing financial considerations with personal relationships. 

Charging interest compensates for the risk that comes with lending money, especially if the borrower runs into financial difficulties. What’s more, charging interest can make the loan feel more professional and less like a casual handout, motivating the borrower to repay the loan promptly. 

On the flip side, charging interest might strain your relationship with the borrower if they are a close friend or family member as it can introduce a level of formality and pressure that might not be well-received. Or, for smaller amounts or short-term loans, it might be more reasonable to forgo interest. 

Ultimately, there is no one-size-fits-all answer as to whether you should charge interest on a personal loan to a friend or family member. It largely depends on the specific circumstances and your relationship with the borrower. That being said, if you do decide to charge interest, you should make sure this is documented in the loan agreement, including the interest rate and how it will accrue (i.e. monthly or annually).

If you're unsure of how to include these kinds of terms in your loan agreement, a solicitor can help you draft terms that make this clear to both of you.

Contact us today for a free case evaluation and fixed-fee quote for the services of a specialist lawyer in drafting a personal loan agreement.

How can I bring up the need for a loan agreement with my family member or friends?

Discussing the need for a loan agreement with a family member or friend can be delicate, but approaching the conversation with the right mindset and communication techniques can help ensure it goes smoothly.

It’s best to have these conversations in a quiet, private setting where you are both relaxed.

You should explain that a loan agreement is not about mistrust but about protecting both of you and your relationship. Having everything in writing will help you avoid potential misunderstandings or arguments and give you peace of mind in knowing there is a clear plan in place for how the loan will be repaid and what you should both do if the borrower has trouble paying it back.

If the conversation does feel awkward, you might suggest involving a neutral third party, such as a money, tax, and debt solicitor to help draft the agreement.

Should we involve a solicitor in drafting the loan agreement? 

It’s not always necessary to involve a solicitor in drafting a loan agreement, but it can be helpful, particularly for larger loans or more complex situations. 

While on the face of it engaging with a solicitor can feel like a formal step, it can take the pressure off both of you and ensure the terms are fair. A solicitor can also bring an outside perspective, highlighting risks you may not have been aware of and providing expert advice on how to mitigate these risks and preserve the relationship with your family member or friends.

How can we stay friends if things go wrong?

It's natural to worry about the potential impact on your relationship if things don't go as planned when you lend or borrow money. However, it is possible to maintain your relationship even if complications arise if you: 

  • Set clear expectations from the start with a written loan agreement

  • Maintain open and honest communication, especially if the borrower encounters difficulties in making payments

  • Are flexible and understanding

  • Separate personal and financial issues

  • Have a contingency plan for if the borrower can’t repay the loan

If conflicts do arise that you can’t resolve on your own relating to a personal loan agreement, mediation can help. 

What should I do if my family member or friend can't repay the loan on time?

It can be stressful to discover your family member or friend can’t repay the money you lend them.

In the first instance, you should start a conversation with your friend or family member about the loan, making it clear that you want to work with them to find a solution. Politely ask about their situation and financial difficulties and assess whether the issue is temporary or long-term. It's important to know this as it will influence your next steps.

Potential solutions if a family member or friend is unable to repay the loan on time include: 

  • Adjusting the repayment terms like extending the loan period, reducing the monthly payment amount, or offering a temporary payment holiday

  • Accepting partial payments until they can resume the regular payment schedule

  • Reducing interest or temporarily suspending it. 

If you do agree to new terms, document them in writing. Alternatively, you may decide to speak to a solicitor about the agreement and make sure it is legally binding and enforceable.

Possible alternatives to loan agreements when lending money to family or friends

Sometimes, a formal loan agreement between family members or friends might not feel right.

If that is the case, there are some possible alternatives to consider.

For example, if you are financially able you might consider giving the money as a gift. This removes the pressure of repayment and potential strain on the relationship if that's your main concern.

That being said, even with gifts it can be helpful to document the transaction to avoid misunderstandings later. This doesn't have to be complex or costly, however. A simple letter outlining the gift is more than enough.

There are other alternatives you might consider depending on the context of the loan. Like setting up a joint venture if the loan is related to a business or setting up a trust to support family members financially without direct loans.

Nonetheless, where money is involved it's always a good idea to seek professional advice to ensure everything is handled properly.

How can Lawhive help? 

Creating and managing a loan agreement between family or friends can be delicate but having a written agreement provides clear terms and legal protection for both parties. 

At Lawhive, our network of specialist lawyers is on hand to: 

  • Provide expert advice on the legal requirements and best practices for personal loan agreements 

  • Advise on potential risks and how to mitigate them

  • Draft any documents or agreements

  • Offer mediation services if disputes arise. 

If you’re considering lending money to a family member or friends, or if you need assistance drafting a loan agreement, contact us today for a free case evaluation and get a free quote for the services of a specialist solicitor. 

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