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What can I do if someone defaults on my personal loan?

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What can I do if someone defaults on my personal loan?

Personal loans are a common way to financially help out businesses, family or friends. But what happens if they don’t or can’t pay you back? And what can you do about it as the lender?

In this article, Dispute Resolution Specialist Jason Grimster answers these questions and more; discussing your options when a loanee defaults.

How do you deal with loan defaulters?

Well, this depends on:

  • The relationship you have with the person or company that you’re lending to, and
  • The terms of the agreement

Should you end up at Trial for this sort of dispute, the type of relationship you have with the loanee will affect the Court’s decision.

Before considering legal action, you should determine whether the money was a loan or a gift.

What is the difference between a loan and a gift?

A loan is the lending of money by one or more individuals, organisations, or other entities to another.

The ‘loanee’ is usually liable to repay the amount borrowed over a specific period of time, with added interest to make the lenders position more favourable.

When is a loan considered a gift?

A gift is something, such as money, which is given willingly to another without the need for repayment.  

When is a loan legally binding?

Some agreements will not be presumed as legally binding by Court.

So, as a lender, you’ll need to challenge this presumption if you want to be successful at recovering a loan from friends or family.

In an attempt to avoid disputes, you should prepare relevant agreements and contracts with the borrower.

This will allow you to prove that the loan is not a gift and therefore ensure that you can recover it.

Are verbal loan agreements binding?

It is common that verbal agreements can be legally binding.

However, if the loanee was to argue that the loan was intended as a gift, it would be up to you to prove otherwise.

For more information about these types of agreements, and the requirements, please refer to our separate article on loan agreements here.

What are the main advantages of a secured loan?

A secured loan requires the borrower to offer assets as collateral. These assets are essentially security for the repayment of the loan.

Should the borrower default on the loan, the collateral would be forfeited to ‘pay’ the outstanding debt.

A secured loan is a good way to ensure that the borrower is forthcoming with payments, in accordance with an agreement.

What are my options if someone defaults on my personal loan?

Should the borrower default on the loan, there are a few steps that you can take before seeking further advice.

Speak to the debtor

First, a conversation with the debtor may prompt them to continue or even finalise their repayments.

Pre-Action Protocol

If speaking to the debtor proves unsuccessful, you could send a formal letter to them in accordance with the Pre-Action Protocol.

This would advise the debtor of:

  • The payment due,
  • The amount of time they have to make the payment, and
  • Your rights to issue court proceedings should payment not be forthcoming.

Court Action

If the time elapses and you are still yet to receive payment, you can make a claim through the County Court.

If successful, a County Court Judgement (CCJ) would be issued to the debtor which would state:

  • How much is owed;
  • How the payment should be made (in full or instalments);
  • How long they have to pay; and
  • Who to pay (you!)

A Dispute Resolution Lawyer’s View

Jason Grimster, Specialist in our Dispute Resolution Team, says: “It’s important to have a strong, written agreement in place to reduce the risk of non-payment.

Having a clear agreement in place will be a crucial factor for the Court, to help ensure that any repayment claims are successful.”

Related articles

What are loan agreements and what should they include?


Can I claim against an estate if the deceased owes me money?

Specialist Dispute Resolution Solicitors

If you are having any problems with borrowers who have failed to make payment in line with an agreement, our bright Dispute Resolution Team would be more than happy to assist you.

We can help you with the recovery of debt as well as the enforcement of a County Court Judgement.

Call us on 01202 499255 or fill out the form at the top of this page for a free initial appointment.

The content of this article, blog or video is not intended as specific legal advice. For tailored assistance, please contact a member of our team.