Six Things to Consider Before Lending Money to Friends and Family

It’s not uncommon to hear about things going wrong when friends and family lend each other money.

Here is our list of six things to consider before agreeing to do so.

While signing a formal loan agreement seems a bit of a stretch when it comes to dealing with friends and family, it can come in handy down the road. The deal doesn’t have to be long, but it’s helpful to record conditions like loan amount, interest rate, and when you expect to be repaid.

You don’t have to charge interest on the loan, but if you choose to do so, any interest you receive from the borrower will likely be subject to income tax. The borrower may also have to withhold tax from interest payments made.

You can decide to protect your money by taking collateral for your loan. A common example is where parents lend money to help their child buy a house and secure it by taking over the property. If the parents are not reimbursed before the sale of the property, they can be reimbursed from the proceeds of the sale.

  • Consider the consumer credit scheme

When the borrower is an individual, the consumer credit regime must be taken into account. A regulated credit agreement must comply with the requirements set out in the Consumer Credit Act 1974 (the ACC).

It is likely (but not always the case) that a loan agreement between friends or family will be classified as a “non-commercial arrangement”. If this is the case, most of the requirements set out in the CCA will not apply.

However, it is good to be aware of CCA because the danger is that when the loan agreement has to be CCA compliant but does not, the loan may be unenforceable and the lender will not be able to sue the borrower. for reimbursement.

  • Is FCA authorization required?

Authorization from the Financial Conduct Authority (the FCA) is necessary when certain activities are carried out “in the course of a business” and an exemption (as set out in the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001) does not apply.

While a family and friends loan is unlikely to be operated as a business when it comes to a one-time loan from the lender, it is not uncommon and will depend on the circumstances.

Troy M. Hoffman