Family Loan Agreements: How to Avoid Disputes, Protect Relationships & Stay Legally Compliant

Liam Mulvee September 23, 2025

When money is needed and commercial lenders feel too rigid or expensive, many people naturally turn to those closest to them, their family.

On the surface, family loans seem simple. Fewer formalities, flexible terms, and often no interest. Yet beneath the informality lies a complex legal framework that is often overlooked. Even the most well-intentioned arrangements can give rise to misunderstandings, and in some cases, costly disputes.

Whether you are offering funds to or accepting funds from a family member, it is worth understanding the legal context. While the conversation may begin with informal trust, future consequences may require evidence and clarity.

Why Family Loans are Common

There are the obvious financial and often expected benefits of arranging borrowing between family members. The deal usually comes with at least competitive, if not low or no interest applied to the repayment and there can be more flexibility on the repayment terms.

Borrowers often view family arrangements as more understanding and supportive, in contrast to the increasingly automated and impersonal processes of traditional lenders. It is usually faster to arrange, with no extensive checks, conditions or added fees compared to traditional bank lending.

Unfortunately, the informality that underpins the benefits can also trip people up. Without structure, parties risk mismatched expectations. A generous gesture may later feel like an obligation and the intended help becomes a source of conflict or can even need detailed explaining to other future lenders.

Gift or Loan? Understanding the Legal Distinction

One of the most frequent sources of conflict in family lending is whether the money was intended as a gift or a repayable loan.

This distinction is not always easy to prove. In cases where no written agreement exists, courts may rely on legal presumptions. For example, where a parent transfers money to a child, the law may apply the “presumption of advancement” to presume the transfer was intended as a gift rather than a loan.

This doesn’t mean the parent cannot claim it was a loan, but the burden of proof falls on them to show otherwise. This can be especially difficult if no written terms were agreed at the outset.

The Value of a Written Family Loan Agreement

A clear, written agreement can help clarify intent and protect both parties, regardless of relationship. This should ideally set out:

Loan amount
Loan purpose
Whether interest is payable
How and when repayment is expected
What happens in the case of non-payment
Whether the loan is secured
Whether the money is expressly not a gift

Even if the relationship is strong now, these documents provide certainty if memory fades, circumstances change, or disputes arise. Things can change in the future, particularly where death, divorce, or financial stress of either party enter the picture.

Do Family Loans Fall Under Consumer Credit Regulation?

People rarely think of family loans as financial services. However, under certain circumstances, the law might. Even private arrangements can fall within the scope of consumer protection and credit regulation.

In the UK, many personal loans are governed by the Consumer Credit Act (CCA). This means that unless a loan qualifies for certain exemptions, lenders may face legal restrictions and obligations.

Whether a particular loan is regulated will depend on a number of factors, including:

Loan purpose (e.g. business vs personal purpose)
Type of borrower (e.g. individual vs company)
The borrower’s specific net worth or income position
Terms and structure of the arrangement

Importantly, you should always check the current thresholds and conditions around these points at the time of lending, as they may be subject to change.

Getting this wrong can see the parties lose control of what started as a supportive offer to help out. If a loan is found to be regulated and the lender did not comply with required formalities (such as being authorised or using compliant agreements), they may not be able to legally enforce repayment.

FCA Authorisation: Do You Need Permission to Lend?

Another important consideration is whether authorisation from the Financial Conduct Authority (FCA) is required.

Many people assume this only applies to banks or businesses. But even individuals can find themselves caught, depending on how their lending activity is viewed.

A key question is whether the loan was made “by way of business”. Several factors are to be considered, including the frequency of lending, the context of a particular loan, the scale of lending and the parties’ intention.

Factors that may indicate a loan is being made by way of business include:

Making loans with a view to profit or interest
Entering into multiple substantial loans
Using formal, secured arrangements
Lending to people outside your immediate circle

In contrast, while never guaranteed; a single, interest-free loan between close family members is less likely to be seen as a business activity. Every situation should be assessed on its own facts, and assumptions can be risky.

Securing a Family Loan Against Property: Extra Risks

A further complication arises when loans are secured against land or residential property.

If a loan is secured over the borrower’s home, for example by registering a legal charge; it may fall under the rules governing regulated mortgage contracts.

Again, this is not limited to banks. Even family members with a charge over the borrower’s home may be entering a regulated transaction. The law in this area is detailed and highly specific, often turning on:

Who the borrower is
Whether the loan is for personal or business purposes
How much of the property is used as a dwelling
Whether the lender is acting in a business-like capacity

Before taking or offering any security over land, it is crucial to understand whether the arrangement could be classed as a regulated mortgage activity, which may trigger additional legal requirements.

When Family Loan Arrangements Break Down: The Importance of Documents

Most family lenders do not expect to go to court. But breakdowns in arrangements happen, especially where circumstances change.

Perhaps a borrower can no longer afford repayments and stop communicating with their family. Maybe the lending family member’s circumstances change, leading them to seek early repayment. We see many lending clients who, while happy to help, have an understandable concern on the ‘what-ifs’ should the borrower marry, divorce, have children or become insolvent. There could be future third-party involvement, for example if the lending family member passes away and their executors attempt to recover the debt.

Without documentation, such scenarios can lead to disputes, often reducing the matter to one person’s word against the other’s.

With documentation, you have something tangible to rely on, meaning a much better chance of preserving the original intention for how the money should be used or repaid, which ultimately increases the chances of maintaining the parties’ good relationship that started the whole chain of events.

Having an agreement in writing does not mean the relationship is impersonal. On the contrary, it shows mutual respect and a desire for both short and long term clarity for everyone involved (and those who could become involved later).

How We Can Help With a Family Loan Agreement

At The Jonathan Lea Network, we help clients avoid costly pitfalls by drafting clear, balanced family loan agreements tailored to their needs.

We can help ensure that the loan is legally enforceable, the arrangement avoids accidental regulatory breaches, recorded terms reflect both parties’ intentions and correct procedures are followed for any related charges or security.

Whether you are lending a modest sum or substantial capital, we can help structure the arrangement effectively and provide peace of mind.

We offer a free 20-minute consultation to discuss your circumstances and explain how we could help. There is no obligation to proceed further following the call, and you will come away with a plan for your next steps.

📧 Email us at wewillhelp@jonathanlea.net
📞 Call our friendly team on 01444 708640

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.