Olivia Parkinson, Trainee Solicitor in Frettens' Corporate and Commercial Team, gives an overview of loan agreements, outlining what should be included within one and discussing the role of the Consumer Credit Act 1974 when loaning to family or friends.
What is a loan agreement?
Loan agreements, commonly referred to as ‘facility agreements’ are a legally binding document between a lender and a borrower. They set out the terms on which the lender is prepared to loan money to the borrower and the mutual obligations of each party.
What should be included in a loan agreement?
A well drafted loan agreement should include information such as:
- The amount of money to be loaned
- The timeframe in which the money is to be repaid
- The agreed method of repayment
- What the ramifications are of late or non-payment
- The amount of interest (if any) to be repaid
- Details of any security required to protect the lender
Can I lend money to family and friends?
It is becoming ever more popular for people to loan money to friends or loved ones. This could be to assist someone in buying anything from equipment for their line of work, to a new home. It is important to understand that these kind of loans to a family member or friend could fall within the provisions of the Consumer Credit Act 1974 (‘CCA').
What do I need to do if the CCA applies to my loan?
If a loan is caught by the provisions of the CCA, you should:
- Check whether the lender needs authorisation from the Financial Conduct Authority to make the loan; and
- Ensure that the loan agreement complies with the regulations set out in the CCA.
When is authorisation needed?
Authorisation from the Financial Conduct Authority is required unless:
- The loan falls under an exemption as defined in articles 60C to 60H of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; or
- The loan is not made “by way of business”.
Case law suggests that 'by way of a business' includes factors such as whether there were frequent substantial loans being made, whether the loans were made in order to generate profit and what relationship there is between lender and borrower.
What should I do before I make a loan?
If you are considering making a loan to a family member or a friend, we would recommend that you seek legal advice before doing so, to ensure that you are complying with the relevant legislation.
The Commercial Team at Frettens also advises on loan agreements generally so can offer all of the advice in one place.
What is a secured loan?
A secured loan is where the money that was loaned is secured by placing a charge over an asset (usually belonging to the borrower), where the charged asset acts as collateral should the borrower default on the loan.
This gives the lender comfort in knowing that if the borrower is unable to repay the debt, this can potentially be recovered from elsewhere. It is often the case that some form of security will be required by the lender, particularly where a company borrowing funds is newly incorporated.
What types of loan security are there?
Security can take many different forms. For example, if you are lending to a company, you might consider asking the directors of the company to personally guarantee the payment obligations of the company under the loan agreement.
This way, you know that if the company were to be wound up, you could look to the directors personally to repay the loan. Another option would be to obtain a debenture (similar to a legal charge) over the company itself.
For loans to individuals, a loan can be secured against assets such as property belonging to the borrower. This would essentially take the form of a mortgage, which would be documented as a legal charge and registered against the property at the land registry.
The registered charge would then give the lender a proprietary interest in the property and if the property was subsequently sold, the lender would have a first right over any sale proceeds needed to repay the loan.
In some cases where a borrower defaults on repayment of a loan, a legal charge can be used to force a sale of property.
What if I am lending money to my children?
A well drafted loan agreement and legal charge should always be considered by parents wishing to lend money to their children to provide security that if their child should marry in the future, those sums do not form part of any subsequent divorce settlement.
A legal charge can be placed on the property so that if the property is sold for any reason (such as in divorce proceedings), the loan is returned to the parents first. See our article for this topic in more detail here.
Commercial Property Solicitors
If you would like to discuss putting in place a loan agreement, a legal charge or have any other commercial related queries, please contact one of our Company and Commercial team and we would be happy to assist.