Tips for Setting Up a Loan Agreement with Family and Friends

Money can often be a difficult topic amongst family and friends . However, there often comes a time in someone’s life when they may need to borrow money from either a partner, parent, or friend.

Unfortunately, financial difficulties can be unpredictable and unavoidable. However, setting up a loan agreement with family and friends can be a viable option if you’d need some additional financial support.

It is always important to consider what impact setting up a binding financial agreement may have on future relationships with your nearest and dearest.

What is a Loan Agreement?

Borrowing money in the form of a loan agreement can enable you to receive money fast while ensuring you can repay it according to an agreement that is suitable to you and the individual you are borrowing from.

The purpose of a loan agreement is to enable someone to borrow money over an agreed period of time while repaying it in instalments or over an agreed time frame.

A loan agreement can help protect both the borrower and lender and ensure both parties are aware of the transaction and its requirements.A loan agreement, whether taken through an online direct lender, an in-person financer, or between family members, can ensure that the money borrowed is paid back according to the agreed terms. Hence, making it a legally binding contract.

Is a Loan Agreement Between Family and Friends Legally Binding?

A loan agreement is likely legally binding if you and the person you are borrowing money from have made promises, agreed to the terms, and signed the agreement. A loan agreement outlines each party's obligations to the other and defines the repayment terms for the loan.

Whether you agree to a short-term loan or a longer-term one, the loan agreement is there to protect both parties. In the unfortunate event that one party breaches the agreement, the injured party may be able to seek legal remedies.

How to Borrow Money From Family and Friends

Money doesn’t need to be a taboo topic, so if you’re thinking of setting up a loan agreement with a family member or close friend, then the easiest way to begin this process is to be transparent.

When drafting the loan agreement, make sure to include the principal loan amount that is being given to you. Second, outline the repayment term and amount. If you are repaying the loan in monthly instalments, ensure the correct due date is listed and the monthly payment amount is right. Lastly, if you are subject to interest, also clearly define the interest rate.

Moreover, you may want to include a clause that states what the parties may do in case of a breach. Possible remedies may include legal action, repossession of collateral, or additional costs.

How Can I Benefit from a Loan Agreement with Family or Friends?

Setting up a loan agreement with a family member, like a parent or sibling, or between you and a long-term friend is a viable option if you’d prefer to borrow money from someone you know and trust. However, always make sure that you have prioritised your debts properly before you do set up any loan agreement in any form.

If you’re considering borrowing money from someone you know or even lending, then here are some advantages:

• You know and trust them

• You may borrow the money regardless of your credit history or score

• Chasing repayments is easier as you know them

• You can choose the amount of money to borrow

• You can choose your repayment terms and amount

• You may be exempt from interest

• You can use the money for any purpose, as some loans prohibit this

• Easy to set up

• The agreements are on your terms

What Are the Disadvantages of Loan Agreements with Family and Friends?

In contrast, borrowing or lending money to a family or friend can have its disadvantages. While a loan agreement has its many benefits, it can also lead to tension between people if repayments are late or even missed.

Read below some of the drawbacks to consider before setting up a loan agreement with someone you know:

• The agreement is legally binding, so the contract cannot be breached

• Late payments or missed payments can cause tension

• People may take advantage of an informal agreement

• Money may be lost if the borrower cannot repay

• The lender may use their power over the borrower

• Unnecessary tension may arise due to money problems

Setting Up a Loan Agreement: The Outcome

By now, you should hopefully be more familiar with how you can set up a loan agreement with family and friends. Ultimately, both parties should set up an agreement which they are both comfortable with and in the financial position to do so.

Setting up a contract between parties can also ensure the individuals involved are held accountable. However, if a loan from a family member or friend does not seem like an option for you, then you can consider alternative options like personal loans from online lenders that are partnered with Doddler.

Maggie Clarke Content Ops Lead

Maggie leads the content operations team at Doddler.co.uk. She is an expert on personal finance, by way of a lifetime of gathering practical knowledge on what to not do with your pocketbook. When not blogging about money, Maggie can be found rambling through the roughest terrains. She considers herself charming yet troublesome and would love to meet you someday, just not today.