Want to help a friend or family member get out of financial trouble? Do it the right way so you can avoid the stress and make sure your relationship doesn't turn sour.
It doesn't matter if you're lending or borrowing money. A written loan agreement will help keep your friend and family loans running smoothly. You'll need to create a document that will hold up in court and include all the key details. Read all about it in this guide👇
Disclaimer: This guide is intended to be used for informational purposes only and it does not constitute financial or legal advice. All content is believed to be accurate at the time of publishing.
Loan agreements are legally binding agreements between a borrower and lender that explain the terms of a loan, including payment details, interest, late fees and more.
Sometimes these are also known as a promissory note. These agreements can be used to record the terms and conditions of a loan between your friends or family.
It’s a legally binding IOU, where a borrower makes a promise to repay the lender the principal amount (and any interest that is agreed).The agreement should include all the key elements below and be signed by all the parties involved to be legally binding.
To be legally binding, yes, the loan agreement will not hold up in court if it's agreed verbally or with a handshake. It should be written and signed by the lender and borrower. This provides clarity to both the parties involved and displays the terms and conditions of the agreement.
The short answer is that it’s up to you. Some people may not want to charge their friends or family any interest on borrowed money, which is fine. Or you may consider charging some interest to ensure you’re not out of pocket due to inflation or if you’ve needed to take money out of your savings that were earning you interest elsewhere.
While you can charge any interest amount you want, as it’s a loan to a friend or family member you might want to charge less than a bank would charge for a personal loan e.g. ‘mates rates’. This keeps things fair, and charging too high of an interest rate could void the contract (more on that later).
It is also worth noting that charging interest on a loan would count as earnings and could affect how much tax you have to pay and require you to inform HMRC by submitting a tax return.
Signing and dating a loan agreement or promissory note makes it official, but if both parties agree, changes can be made to the original contract. The best thing to do is to talk about it in advance and make arrangements that suit both parties.
People may amend loan agreements for a variety of reasons. It may be to change the repayment dates, increase or reduce the interest charged or waive the remaining loan amount entirely. People's circumstances may change and you should consider whether you wish to accommodate changes to the agreement when you set it up.
It’s a common misconception that because friend and family loans are a personal arrangement, there won’t be any tax implications. For loans without interest, you won’t need to tell HMRC.However, if there’s interest involved, you’ll need to inform HMRC and fill out a self-assessment as it may be liable as taxable income.
When a friend or family member doesn’t live up to their end of the agreement things can start to become complicated. Failure to pay back personal loans can lead to awkward conversations and even a breakdown in relationships.
Here are the steps you should take if it looks like the loan may not get paid back 2. Why should I use a loan agreement? You may trust the person you’re lending money to but having a loan agreement in place keeps the agreement crystal clear for both parties, sets exceptions and protects you in a range of situations.
This article takes a look at what constitutes a loan agreement and how to use one when lending your friends and family money.
It makes the agreement legally binding
Creating a loan agreement when lending or borrowing money with friends and family makes the agreement legally binding. Where the agreement can easily be referred back to and everyone involved has a clear understanding of the terms.
You can write a loan agreement on paper, but having a digital copy keeps it more secure and legible and easier to refer back to.
It gives the lender confidence in lending their money
Having an agreement that is legally binding gives the lender more confidence to lend their friends or family some of their money.
The agreement sets out the terms so that they are clear for both parties. And, should the worst happen the lender could use the agreement in court if they wish to pursue legal action if they’re not repaid.
It takes the awkwardness out of lending to friends and family
Many people avoid friend and family loans because they feel that a formal agreement can complicate the relationship, or are just awkward altogether. The dynamic between the lender and the borrower can feel weird… we get that.
Punk Money removes all of this awkwardness. With a contract being generated automatically and repayments being made on autopilot, it takes away the need for those stressful money conversations and leaves you free to help your friends and family financially - without worrying.
It gives the borrower accountability
People usually don’t set out to not repay a loan from someone they know and trust. Sometimes, the line between a loan or a gift can become blurred when we’re borrowing from people we know. Having a loan agreement sets clear expectations from day One. Making the agreement legally binding. Ensuring the borrower will treat the loan from a friend just like a loan from a bank (just without the sky-high interest).
It should now be clear to you that having a loan agreement when lending or borrowing with your friends and family is a no-brainer. It makes life easier, takes away the complications and keeps you tax compliant. Punk Money takes all the stress out of lending money to people you love and gives you everything you need to preserve your friendship and help your friends and family when they need it the most.