Sometimes, even if you take all the correct steps when lending money to someone you know, the other person may not live up to their end of the agreement. When someone doesn’t pay their loan back, this is where the relationship can complicate.

Fortunately, signing a loan agreement at the beginning of the agreement gives you options at this point. You may choose to forgive the loan and write it off, avoiding confrontation and making peace with the fact you won’t be paid back. 

Or if you want all or some of your money back, or maybe it was a large sum you don't want to let slide. Follow these next steps👇

1. Have an open conversation with the borrower

It may be that your friend or family member is going through a difficult time, or didn’t account for unexpected financial expenses. Or perhaps they just completely forgot to make the repayment. 

It can be awkward for everyone involved, but if you kick things off with an open conversation you may be able to resolve the situation quickly. 

2. Send the borrower a copy of the loan agreement

It is best practice to remind the borrower of the original terms of the loan. You could send the loan agreement over to them as a reminder of what was agreed.

A refresher of the agreement could persuade them to live up to their end of the deal, particularly when they read about the legal repercussions. 

3. Document everything

At this stage, you should be keeping a paper trail of your conversations with the borrower. Make sure you have copies of all your communications with the borrower whether that’s in person, digitally or written. Just in case you need to show it as evidence in the courtroom. 

4. Send a demand letter

Also known as a letter before action, this is the final reminder you may send to another in an attempt to resolve a dispute. It specifies what the recipient must do to resolve the dispute and warns of legal proceedings if a resolution isn't reached.

This shows the borrower that you mean business and gives them one last chance to repay you. 

5. Debt settlement agreement

Solving these sorts of disputes with a borrower can be tricky if the borrower simply cannot afford to repay you. 

In this case, you could set up a debt settlement agreement. This is where you create new terms in writing with the borrower so you are partially repaid from the total debt outstanding. 

Although you will still be out of pocket, it gives you an option to settle the dispute and recoup some of your cash.

6. Take action

If none of the above works out for you, you should follow up with legal action to collect the debt owed to you.

There are a few options here. Remember, when it comes to friend and family loans, there can be a lot of emotions involved. To avoid these getting in the way of your decisions, seeking legal advice will give you the best outlook. 

However, you can go ahead and take matters into your own hands and make a court claim. This is where you apply to a county court to claim money you’re owed by a person or business. This is best for claims below £5000. 

For more info on making a court claim check out citizens' advice: https://www.citizensadvice.org.uk/law-and-courts/legal-system/small-claims/

A mediation service could be quicker and cheaper than going to court. Mediation is when an impartial person helps both sides work out an agreement.

What to consider before taking legal action?

Can you prove the money was given as a loan?

A gift is when someone gives another person money without the expectation of being repaid. Whereas a loan is given with the expectation to be repaid. If you cannot prove that the money was given as a loan and not a gift, then your argument will not hold up in court. 

Can your friend or family member afford to repay you?

If the borrower has no money or assets, then taking them to court will not get you any further in being repaid. If you win the case, the borrower will likely receive a CCJ but may still not repay the loan. This does depend on the circumstances of the loan. 

You should also factor court fees into your decision. Within a court claim, the fee depends on how much you borrow. 

For example, If the claim amount is less than £350, the fees will come to £35. See the full details here: https://www.gov.uk/make-court-claim-for-money/court-fees

These steps should steer you in the right direction when it comes to solving disputes in a friend and family loan. They may not be the easiest conversions to have with a borrower, but by signing a contract you have right to retrieve your hard-earned money.