A loan agreement, which is also known as a facility agreement, is a legally binding agreement between a borrower and a lender. These agreements lay out the terms of the lending arrangement and what the obligations are for each party for repaying the loan.
Why would you need a loan agreement?
It is important to have a loan agreement in place before you lend money to anyone. If you don’t have it in place, you have no legal comeback if the person decides not to repay the money. Even if you are lending to friends or family, it is still advisable to have a loan agreement in place as it could easily cause fractures in relationships if there are any disputes over money.
What would you expect to find in a loan agreement?
A loan agreement would usually include how much money is involved, the timeframe for the repayment of said funds, how the money is to be repaid, what happens if the loan is not repaid, how much interest is to be added on and any security which is in place to protect the lender.
What should you do if you want to lend to family or friends?
If you decide to lend money to family or friends, it is important to get legal advice. Specialist lawyers such as https://www.parachutelaw.co.uk/loan-agreement can offer the relevant help and advice to draft a loan agreement.
It is also important to assess whether the loan falls within the remits of the Consumer Credit Act (CCA) 1974. If the loan is within the remit of the CCA, you will need to check whether it needs additional authorisation from the Financial Conduct Authority.
Additionally, if you are a parent wanting to lend money to your children so that they can purchase a home, you can arrange to have a legal charge placed on the property. This ensures that if the property is sold, the loan will always return to the parents.
Does the loan need to be secured?
If a loan is secured, it means that a charge is placed on an asset belonging to the borrower. This then gives the lender the added security that the funds can be recouped if the borrower defaults on the loan agreement. A loan could be secured on a property, or if you were lending to a company, it could be secured against the directors.
