Six things to consider before lending money to friends and family

It is not uncommon to hear of matters turning sour when friends and family lend money to each other.

Here is our list of six things to consider before agreeing to do so.

• Get it in writing

Although signing a formal loan agreement seems a little over the top when dealing with friends and family, it may prove useful later down the line.  The agreement does not need to be long, but it is helpful to record terms such as the amount of the loan, the interest rate and when you expect to be repaid.

• Interest

You do not have to charge interest on the loan, but if you decide to do so, any interest you receive from the borrower will likely be subject to income tax.  The borrower may also need to withhold tax on any interest payments they make.

• Security

You may decide to protect your money by taking security for your loan.  A common example is where parents lend money to help their child buy a house, and secure this by taking a charge over the property.  If the parents are not repaid before the property is sold, they can be repaid out of the sale proceeds.

• Consider the consumer credit regime

Where the borrower is an individual, the consumer credit regime needs to be taken into account.  A regulated credit agreement must comply with the requirements set out in the Consumer Credit Act 1974 (the CCA).

It is likely (but not always the case) that a loan agreement between friends or family will be classified as a “non-commercial agreement”.  If so, most of the requirements set out under the CCA will not apply.

However it is good to be aware of the CCA as the danger is that, where the loan agreement should comply with the CCA but fails to do so, the loan may be unenforceable and the lender will not be able sue the borrower for repayment.

• Is FCA authorisation needed?

Authorisation from the Financial Conduct Authority (the FCA) is needed where certain activities are carried on “by way of business” and an exemption (as set out in the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001) does not apply.

Whilst a loan to family and friends is unlikely to be carried on as a business where it is a one off loan by the lender, it is not unheard of and will depend on the circumstances.

• Ask for advice

If you have any concerns about lending to, or borrowing from, friends and family, we would highly recommend taking professional advice – it is always far easier to resolve any issues before the loan is made, rather than after.