I have been asked if I could draft up a Personal Loan Agreement to be used in the simplest of situations, for example where one family member loans money to another, or where money is loaned between friends or colleagues.

I don’t draft Agreements but I do recommend using a simple Loan Agreement, which one can find at Simply – Docs. I like simple Agreements and the one I recommend provides for the money to be paid to the borrower in one lump sum on a single date. Repayment is also on a fixed date. However, in the Agreement there is a provision enabling the lender to demand repayment of the loan at any time, subject to service of a written notice. The borrower will be obliged to pay the loan back at the end of the period specified in the notice (for example, this could be fixed at one month, to allow the borrower sufficient time to find the funds).

The Agreement provides a clear and unambiguous contract between the lender and the borrower, thus avoiding any dispute over the existence of the debt. If the borrower failed to repay, it would be open to the lender to bring a claim in the small claims track of the court system to recover the debt, using the Agreement as the basis of the claim.

If you require an agreement with more protection for the lender, please refer to other documents on the site, in particular to the short version of the loan agreement. A further step would be to take some form of security against the loan – for that, look at the secured loan agreements.

However the legal issues surrounding the taking of security are complex, and there are various legal forms that can be used, for example, a chattel mortgage (a mortgage over tangible and moveable property, such as plant and machinery or vehicles), fixed and floating charge, pledge, lien and assignment by way of security. Security over shares is different again, and can be achieved by way of a legal mortgage, an equitable mortgage or an equitable charge.

There are therefore a number of issues that need to be addressed, in order for a lender to enforce their security.
In view of the complexity of taking security, everyone should take legal advice to ensure that the proposed security is enforceable in the event of default in the repayment

[NOTE: My understanding is that the Personal Loan Agreement is not intended to be regulated by the Consumer Credit Act 1974 which requires that businesses that lend money to consumers must be licensed to do so by the Office of Fair Trading.]