Collateral or security
It may be a good idea to secure the loan by obtaining collateral, that is, taking something from the borrower which you can sell if they fail to repay the loan.
Ideally it should be something which would cover the value of the loan, but if there is nothing of sufficient value, choose something of personal value to the https://installmentloansgroup.com/payday-loans-ny/ borrower which will give them incentive to stick to the terms. You should include this collateral and what can be done with it in the terms of the agreement.
Most people who lend to family or friends do not charge interest. However, you should consider whether you will lose significant earnings on the money during the period. It could be a good idea to charge at least the same interest that you would earn on the money if it stayed in your possession. Charging interest will also discourage the borrower from viewing the loan as a gift.
Simple interest calculations are usually the best, and the simplest is a fixed amount over the term of the loan, for example, if someone borrows ?4,000 from you, you may charge ?200 of interest to be paid back in equal instalments over 10 months (they pay ?420 a month for 10 months for borrowing ?4,000).
Remember that if you do charge interest it is taxable income in the eyes of Her Majesty’s Revenue and Customs and must be declared as such.
Once you’ve drawn up the agreement, both parties should sign it in the presence of independent witnesses and each keep a copy. Now you can transfer the money to the borrower – do this in such a way that there is an indisputable record of the transfer, for example by direct bank transfer or cheque.
Once the money has been transferred, the agreement takes effect, and now the important thing is to keep records – of the initial transfer, and when and how much you have been repaid. Repayment by standing order is preferable.
If the borrower does not stick to the terms of the agreement, it is your choice as to how to proceed. The first step is to talk to them – establish what the problem is and whether you can resolve it between you. You may wish to vary the terms in the initial agreement (to give them more time to repay, for example). In this case you must both sign the updated agreement with witnesses present.
If the agreement has been breached and you decide you want to get your money back, you can take legal action. For amounts less than ?5,000 you should first approach the Small Claims Court or Money Claim Online. For larger amounts you will need to seek legal advice.
Where to find a suitable agreement template
You can find a template agreement specifically for lending to friends or family in our library. It balances the need to be formal enough so that the borrower knows the loan is not charity with simple language so that the agreement does not seem ‘over the top’ in the situation where the lender and the borrower know each other well.
Our unsecured loan agreement can be used for more formal arrangements where the borrower does not give any security or collateral, while Loan agreement: person to person; secured by guarantee includes the option to bring in a third party guarantor to make sure the loan is repaid.
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- Does not constitute legal advice by Net Lawman;