7 things to consider when lending money to friends & family
#1 Assess the purpose of the loan
The purpose of the loan is going to be central to your decision. If the loan is intended to fund a business venture, consider whether the borrower has explored other available options first that could be better protected.
Consider whether this might put you at a loss for a prolonged amount of time and whether the risk factor is too high.
Loans between friends or family should be approached with caution; in fact, it is sensible to consider all alternatives before agreeing, since emotion can often cloud sound judgment.
#2 Consider how your loan will be repaid
It is important to clarify whether the borrower is seeking a loan, which must be repaid, or a gift.
This distinction is crucial, especially on high amounts as each has different legal and tax implications for both parties.
Why exactly? Just one example is the implications, as if the government regards the transfer of funds as a gift, the borrower may be taxed on it.
#3 Get yourself a written contract
Written documentation is essential to prevent misunderstandings; this is when legal aid is imperative, as a solicitor should prepare the agreement for you.
They’ll be able to keep you protected by clearly setting out the terms of the loan and repayment.
This documentation can support any claim if the borrower does not repay and disputes arise.
#4 Guarantee you have some level of security
Security, such as property, shares, or a personal guarantee, can provide reassurance when making a loan for family and or friends.
Securing the loan with a fixed or floating charge is another option, since these arrangements can be intricate; legal advice is highly recommended.
#5 Lay out repayment terms
Repayment terms should be clear, this is essentially what would avoid any misunderstandings and therefore disputes.
Depending on the size of the loan and the nature of officiality that you want to impose, this can be the difference between you being strongly legally protected and your case being weak should a dispute arise.
Terms should be realistic; a solicitor can help you with that and confirm that you have all relevant details set out in advance.
#6 If repayment fails, get legal advice ASAP
If the borrower does not repay, and you have had a solid, solicitor-written agreement prepared then legal assistance can fight your corner.
However, before taking this step or pursuing litigation, consider working with the borrower to find a practical solution, such as revising the repayment terms.
#7 Third-party support
Involving a solicitor from the outset ensures the loan is taken seriously and that repayment obligations are clear.
This approach also helps avoid disputes and guarantees all repayments are properly recorded.
