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Lending money without taking security is more common than most people realise. Whether you are helping a relative bridge a gap, supporting a friend through a tough patch, or making a private loan to someone you trust, putting the arrangement in writing is sensible.
An unsecured personal loan agreement sets out what has been lent, when it must be repaid, and what happens if things do not go to plan. Without one, disagreements can sour relationships and make recovery through the courts harder than it needs to be.
This guide explains what these agreements typically cover, when they are useful, and the practical issues lenders and borrowers should think about before money changes hands. It is written for private arrangements between individuals in England and Wales, not for regulated consumer credit lending by businesses.
What this document is
An unsecured personal loan agreement is a written contract between two people, or between a person and a small private lender, that records the terms of a loan where no asset has been pledged as security. 'Unsecured' simply means the lender has no automatic right to take possession of a car, property or other item if the borrower fails to repay. Instead, the lender relies on the borrower's contractual promise and, if necessary, the civil courts to recover what is owed.
The agreement usually identifies the parties, the amount lent, any interest, how and when repayments are made, and what counts as default. For private loans between individuals who are not in the business of lending, the agreement is primarily a matter of contract law.
Where a lender is acting in the course of business, the Consumer Credit Act 1974 and related rules can apply, and specialist input is sensible before lending commercially. A clear written record protects both sides and gives the courts something concrete to work with if a dispute arises later.
How to use this document
Agree the headline terms before drafting. Sit down with the borrower and talk through the amount, whether interest will be charged, the repayment schedule, and what happens if a payment is missed. Reaching a genuine meeting of minds before you put pen to paper avoids awkward renegotiation later and makes the written document a true reflection of the deal.
Identify the parties and the loan clearly. Use full legal names and current addresses for both lender and borrower. State the exact sum being lent in figures and words, the date the money will be transferred, and the method of transfer. A bank transfer with a clear reference is much easier to evidence later than a cash handover, so keep proof of payment with the signed agreement.
Set out repayment terms in plain language. Specify whether repayment is a single lump sum on a fixed date or a series of instalments, the amount of each instalment, the due dates, and the payment method. If interest is charged, state the rate, how it is calculated, and whether it is simple or compound. Clarity here prevents most future arguments.
Address what happens if things go wrong. A sensible agreement covers late or missed payments, early repayment rights, and the lender's options if the borrower defaults. It may also deal with death, bankruptcy, or serious illness of either party. Thinking through these uncomfortable scenarios in advance is far easier than trying to agree them in the middle of a dispute.
Sign, date, and keep copies safely. Both parties should sign and date the document, ideally with a witness who is not a close relative of either party. Each side should keep an original or a certified copy somewhere secure. If the loan runs for several years, store it alongside other important paperwork so it can be found quickly if needed.
Template · England & Wales
Unsecured personal loan agreement template
This agreement can be used in any situation where the lender does not require or is willing to forgo security in case of default.
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Common questions
Q Do I legally need a written agreement to lend money to a friend or relative?
No, an oral loan can be legally binding in England and Wales, but proving the terms without a written record is very difficult. If the borrower later disputes the amount, the repayment date, or even whether the money was a loan rather than a gift, a signed document is by far the strongest evidence. For any meaningful sum, writing it down protects both sides.
Q Can I charge interest on a private loan?
Yes, private individuals can agree an interest rate between themselves, and it should be recorded in the agreement. The rate should be reasonable and not extortionate. If you are lending regularly or as a business, different rules apply under consumer credit legislation and you may need authorisation from the Financial Conduct Authority, so take specialist input before going down that route.
Q What is the difference between a secured and unsecured loan?
A secured loan is backed by a specific asset, such as a property or vehicle, which the lender can take steps to recover if the borrower defaults. An unsecured loan has no such backing, so the lender must rely on the borrower's promise to pay and, if necessary, civil court action to enforce the debt. Unsecured lending carries more risk for the lender.
Q How long do I have to recover an unpaid loan through the courts?
Under the Limitation Act 1980, simple contract debts generally need to be pursued within six years of the cause of action arising, which is usually the date a payment was due but not made. If the deadline passes, recovery through the civil courts can become very difficult. Keep track of missed payments and take action in good time rather than letting matters drift.
Q What happens if the borrower dies before repaying the loan?
The debt does not automatically disappear. It becomes a liability of the borrower's estate and is dealt with by the personal representatives as part of the administration process. Having a written agreement makes it much easier to prove the debt to the executors. Whether there are enough assets in the estate to cover it is a separate question that depends on the individual circumstances.
Q Could HMRC treat my loan as a gift?
If the arrangement looks more like a gift than a genuine loan, it can have tax consequences, particularly around inheritance tax if the lender dies within seven years. A properly documented loan with a clear repayment schedule and evidence of repayments being made is much harder to recharacterise. For larger sums, taking tax input before lending is sensible.
Q Can I forgive the loan later if I change my mind?
Yes, a lender can choose to release the borrower from the obligation to repay, either in full or in part. This should be recorded in writing so there is no later confusion. Be aware that writing off a loan can have tax implications, particularly inheritance tax consequences if done shortly before death, so think carefully before doing so.
Brad is on the roll of solicitors of England & Wales but does not hold a practising certificate and does not provide legal advice. LegalDocuments.co.uk is not a law firm and does not provide regulated legal advice.
This article is for general information only. It is a tool to help you find your way — not legal advice, and not a substitute for speaking to a qualified adviser about your situation.
