Personal Loan Agreement Between Individuals

Overview

A personal loan agreement records a loan of money between two individuals (or, occasionally, an individual and a family member's company), setting out the amount lent, repayment terms, and any interest payable. Putting the loan in writing, even between family or friends, is strongly advisable — the absence of any record is one of the most common sources of family and personal disputes, and a written agreement makes clear whether money changing hands was a loan (repayable) or a gift (not repayable), which is otherwise often disputed after the fact. Consumer Credit Act 1974: most lending to individuals in the UK is regulated by the Consumer Credit Act 1974 and requires the lender to hold FCA authorisation. However, genuinely non-commercial, one-off loans between individuals who are not in the business of lending — for example a loan between family members or friends — generally fall outside the regulated consumer credit regime, since the lender is not acting "by way of business". This exemption should not be relied upon for someone who lends money to multiple people or does so as a source of income; regular or repeated lending arrangements risk being treated as a business of lending money and can trigger FCA authorisation requirements. Interest: parties are free to agree an interest rate (or no interest at all) for a genuinely private loan between individuals — there is no general statutory cap on interest rates for private, non-regulated lending in England and Wales, though a court retains a limited common law jurisdiction to refuse to enforce a rate that is truly extortionate or unconscionable in the specific circumstances. Key clauses: the loan amount, whether interest applies and at what rate, the repayment schedule (lump sum on a fixed date, or instalments), any security offered (rare for a personal loan but possible, e.g. a charge over an asset), what happens on default (e.g. the whole balance becoming immediately due), and early repayment terms. Common pitfalls: no written record at all, leading to a dispute later about whether money was a loan or a gift; unclear or missing repayment dates, making it hard to establish when the debt actually falls due (which also affects limitation — a simple contract debt is generally subject to a six-year limitation period under the Limitation Act 1980, running from the date payment first became due); and lending repeatedly to multiple borrowers as an informal sideline, which risks straying into regulated consumer credit territory without FCA authorisation.

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