Lending Money To Friends
15/08/2022
5 min read
Is loaning money to a friend a good idea?
A private loan between friends or family is often easier, cheaper and more convenient that taking out a commercial loan, especially where the borrower is lacking positive credit history and so might not otherwise be able to borrow the money.
The lender may have very good reasons for wanting to the borrower out and can still get a small return on the loan, if an interest charge is agreed.
Unfortunately, financial agreements can put a lot of pressure on any relationship. It can change the dynamic of your friendship an in a worst case scenario you'll lose the money and the friendship in the process.
The borrower is at risk too, as the lender could unexpectedly demand their money back long before the borrower has the means to return it, potentially bankrupting them, depending on the amount of the loan.
Thankfully, loan agreements are designed to establish exactly how much money will be repaid and when, with a plan set out for what you will both do if problems arise on either side.
Loans of £10,000 or less
You can make a money claim for up to £10,000, as long as you have a written agreement. This does not necessarily have to be a legally drafted loan agreement, but, the better it is legally worded, the better your chances of recovering the cash.
Without a written agreement, it is one party's word against the other, whether the money was a gift or a loan.
Money claims are still subject to court fees. If your claim is struck out, your court fees will not be refunded.
This does not protect the borrower. While the lender may still be able to enforce the debt, there is no protection offered to the borrower against the lender suddenly demanding the money back, long before the agreed loan term.
For these reasons we would highly recommend a loan agreement for any amount over £2000.
Can I loan money to a friend interest free?
Yes, you can loan money to friends without charging interest. Having a legal loan agreement does not mean that you are trying to get something out of the borrower, simply that you wish to ensure ensure that both of your intentions are established and respected. We can help you with an interest free loan agreement.
How much interest should I charge a friend?
Most loans between friends are interest free. However, if you are lending the money over a substantial period of time, you should consider whether there will be a substantial loss of earnings compared with if you had for example placed the funds into a savings account or invested it elsewhere.
It can be helpful to account for this, to save you from feeling any resentment toward the borrower, further down the line. Interest may also serve as an incentive for the borrower to repay the loan more promptly, rather than testing your good will.
There are legal limits to the interest you can charge, which we break down in our next article, What is the highest interest rate you can charge on a personal loan?
Looking for a contract for loaning money to a friend?
Whether you are the one lending the cash or you are borrowing money from a friend, a contract helps to protect both parties against misunderstandings, refusal to pay and hopefully any resulting falling-out. Read more about our loan agreement contract service:
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Frequently Asked Questions
As with any loan or investment, you should never risk money that you cannot afford to lose. Even with the protection of a loan agreement, it can take a bit of time to recover the funds.
If the borrower files for bankruptcy, you may never see the money again.
Do not loan money to friends if losing that money could jeopardise your own solvency, unless you are genuinely willing to take that risk for your friendship.
Most loans are secured over the borrower's property. This can be included in your loan agreement, but the 'charge' over the borrower's property should be registered with HM Land Registry. We can do this for an additional fee.
If your loan agreement is not registered with HM Land Registry you will have to go through the court to recover the debt, which can become expensive and may even outweigh the amount owed.
If the borrower does not own a property, your agreement can secure the loan over another asset, such as a car, or other item of value.
The loan can be for any purpose. However, it can be more straightforward if the loan is being used for a purchase. In this instance you can secure the loan against the item being bought.
If you are lending money to friends to pay off other debts, however, this can make things more difficult. If they have no assets of their own and they are not using the loan to purchase anything of value, you are limited as to what you can secure the loan against.
You may choose to leave the loan unsecured, or you could agree to secure the loan on an item of sentimental value, which will not help you recover funds, but will hopefully motivate the borrower to pay up.
