The Covid-19 pandemic has created a lot of uncertainty in the economy and is leading to disruption in businesses and financial markets throughout the world. In these challenging times, when people are experiencing unprecedented financial distress, it is not unusual to seek financial assistance from family, to address the emergency.
It is important to make an informed decision and to consider matters carefully when offering a private loan. From the borrower’s perspective, taking a private loan from family usually offers a better rate and lower cost option than borrowing from a Bank.
The flexibility of the terms of a private loan usually depends on the relationship and individual circumstances between the family members, the lender, and the borrower.
Before any payment is made, the parties should consider the terms of the loan, including but not limited to the period the loan is being provided, the amount of the loan, when and how repayments are to be made, and whether any interest is to be paid and what would happen if the borrower defaults!
It is crucial to consider the borrower’s personal circumstances before lending. How much can the borrower afford to repay and over what period?
If the borrower can’t afford the repayments, the consequences are not simply the recovery of the loan, but also the harm done to the personal relationship between the family members.
Hence why it’s important that the parties must work out a repayment plan considering individual circumstances. The lender should also consider whether the borrower is going to pay any interest on the borrowed amount. It is important to note that there is no obligation for the lender to charge interest.
Another important question to consider is what will be the period of the loan. If the borrower can only offer smaller repayments, the borrower should consider the loan over a longer-term. This then leads to the question of interest being required.
The main advantage of a private loan for the borrower is that it may offer a better rate of interest, if at all!
Can the lender be confident that the family member who is borrowing the money will be able to pay it back in full, and on time? The lender must consider what will happen if they can’t. For this reason, the lender should think about whether some form of security is required.
Usually, the security would be by way of a mortgage over property, if the loan is borrowed for the purpose of purchasing a property. This way, the lender will have more options if the borrower defaults on the loan, and security would give greater comfort to the lender that they will recoup the loan in the future. In the event of a default, the lender of a secured loan will be entitled to step in and sell the property if necessary. However, there are important issues to consider when the loan is secured.
What if the borrower is also seeking another loan from a bank? In which case the bank’s permission would be required for the security related to the private loan. In addition to that, the secured loan may fall within the regulated regime and might need to be authorised by the Financial Conduct Authority (FCA).
Last but not least, it is important to note that expert advice on the tax implications including the inheritance tax position must be taken into consideration when borrowing money from a family member, friend, or any other private loan channels.
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