Lending Money to Your Family
When you are lending money to one of your family members, you don't just need to think about how much to loan, how and when the money is to be repaid, or whether interest is payable.
You should also consider whether the loan is caught by the Consumer Credit Act 1974 which in some circumstances, can include private and informal loan agreements.
This Act gives consumers a variety of rights against lenders, such as the right to a 'cooling off period' or to pay off their credit early, and lays down certain procedural requirements to control the lending process.
The main question to ask here is whether the loan agreement itself is ‘regulated’ (by the Act) or ‘exempt’. This applies whether or not the terms of the loan agreement have been recorded in writing.
A regulated agreement can be made between a private individual, sole trader or partnership (the borrower) and any other person who provides credit for any amount (the lender). The Act specifies that all consumer credit lending will be classified as a regulated agreement for consumer credit purposes and require authorisation from the Financial Conduct Authority. Without this, you could be committing a criminal offence and your loan may not be enforceable, if the obligations for regulated agreements are not complied with.
If the agreement is exempt however, you will not need to obtain a consumer credit licence to lend monies.
It is also worth noting that the courts have the power to change the terms of any credit agreement entered into after 6 April 2007 (ie all consumer credit agreements whether or not regulated by the Act), if the original terms are deemed to be unfair. If so the court can, for example, order the repayment of sums already paid, reduce or even discharge any sums owed.
Before making a loan we therefore recommend you obtain legal advice.
If you are considering making a loan to a family member, or if you have already made a loan and want to know whether you are likely to be caught by the Act, contact us today to speak to an expert legal advisor.