Loans between families and friends are a very quick and easy way to borrow money, particularly if the borrower has poor credit history or is just starting out. These private loan arrangements are very common and seem like the best option to a lot of people. However, it is also very common for these arrangements to back fire and result in arguments and fall outs between once close family and friends. Often the borrower is lent money from family and friends with no intention, or without the means, to pay the loan back in the period the borrower wants.
These private loan agreements are often made informally between family and friends. However, without being formally written down they can lead to difficulties when the enforcement proceedings begin. Below are our top considerations when lending to friends and family:
Agree your terms
When it comes to lending money to family and friends it can be awkward and potentially difficult to request formal procedures. However, having a formal written contract can be the only way to enforce your loan if the relationship breaks down.
The keys to agree on are the amount of the loan, interest rates, term, and amount to be repaid every month.
Write your contract
It is critical that you write your agreement down. If the relationship with the family member or friend turns sour the written agreement may be your only evidence of the loan.
The contract will list the agreed terms clearly and states that both parties understand and agree to the terms. The agreement does not have to be long and there are plenty of examples on the internet. If you are concerned and want extra peace of mind then speak to a solicitor who can draw up the contract for you.
Record the payments
This includes the initial payment of the loan that you make and any subsequent repayments. This will reduce the likelihood of any dispute on the amount that has been paid and repaid. It will also be your first indicator of any problems that are arising.
Keep the agreement up to date
If any problems do arise and you need to change the agreement make sure this is done in writing or in the presence of a third-party witness. This will help you keep track of the changes in the agreement and reduces the risk over disputes as to the terms of the amendment.