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.
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