Unsecured Personal Loan Agreement UK: Full Guide

At a glance

• What it is: a written contract recording a loan where no asset is pledged as security for repayment.
• Governing law for private loans: ordinary contract law — not the Consumer Credit Act's regulated-agreement regime, unless the lender is acting by way of business.
• FCA authorisation: generally not required for a genuine one-off loan between individuals; required for lending carried on 'by way of business' (Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, article 60B; Financial Services and Markets Act 2000, section 19).
• Interest: private lenders can agree an interest rate between themselves; there is no general statutory cap, but a court can reopen an 'unfair relationship' under section 140A of the Consumer Credit Act 1974.
• Limitation period: six years from the date a payment fell due to bring a claim for an unpaid simple contract debt (Limitation Act 1980, section 5).
• On the borrower's death: the debt survives as a liability of the estate, dealt with by the personal representatives.

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 a private, one-off loan between individuals who are not in the business of lending, the agreement is primarily a matter of ordinary contract law.

When does consumer credit regulation apply?

Whether a loan agreement needs to comply with consumer credit regulation, or whether the lender needs authorisation from the Financial Conduct Authority (FCA), turns on a single question: is the lender acting 'by way of business'?

Under article 60B of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, entering into a "regulated credit agreement" as lender is a specified regulated activity. A "credit agreement" for this purpose is simply an agreement between an individual and any other person under which the latter provides credit of any amount — a broad definition that, on its face, would catch a private loan to a friend. What takes most private loans outside the authorisation regime is section 19 of the Financial Services and Markets Act 2000 (the "general prohibition"), which only bites where the regulated activity is carried on by way of business in the UK. Carrying on a regulated activity without authorisation or an applicable exemption is a criminal offence.

A single, genuine loan made as a personal favour — for example, helping a relative with a deposit or a friend through a temporary difficulty — will not normally amount to lending "by way of business", so FCA authorisation is not usually needed. But whether a particular pattern of lending crosses into "by way of business" territory depends on the facts: how often the person lends, to how many different borrowers, whether interest is charged on a commercial basis, and similar factors. There is no single bright-line rule, so if lending becomes a regular activity, or looks like a sideline, specialist advice on the FCA's perimeter is sensible before continuing.

Interest and the courts' unfair-relationship power

Private individuals can agree an interest rate between themselves, and it should be recorded clearly in the agreement. English law does not impose a general statutory ceiling on the interest rate parties may privately agree.

That does not mean any rate is safe from challenge. Sections 140A to 140C of the Consumer Credit Act 1974 give a court the power to reopen a "credit agreement" — defined broadly as any agreement between an individual debtor and any other creditor providing credit of any amount — where the relationship between creditor and debtor is unfair to the debtor, because of the terms of the agreement, how the creditor has enforced it, or anything else the creditor has done or not done. Because that definition is not limited to regulated or business lending, it can in principle apply to a private loan between family members or friends, not only to lending carried on commercially. If a court finds the relationship unfair, it can order repayment of sums already paid, reduce or discharge what is owed, alter the terms of the agreement, or make other orders to put things right. This regime replaced the earlier, narrower "extortionate credit bargain" provisions.

If you are lending regularly, or as a business, different and more extensive rules apply under consumer credit legislation, and separate authorisation and documentation requirements are likely to be triggered — take specialist input before going down that route.

How to use this document

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

Recovering an unpaid loan

If a borrower stops repaying, the lender's remedy for an unsecured private loan is a civil claim for the debt — there is no asset to repossess. Under section 5 of the Limitation Act 1980, a claim founded on a simple contract must be brought within six years of the date the cause of action accrued, which for a loan is usually the date a payment fell due and was not made. Missing that window can make recovery very difficult, so it is worth acting promptly once a payment is missed rather than letting the position drift. For straightforward, undisputed debts, GOV.UK's guidance on making a court claim for money explains the county court process.

This guide provides general information about unsecured personal loan agreements between individuals in England and Wales. It is not legal advice and is not a substitute for advice tailored to your specific circumstances.

Last reviewed: August 2026 · Next review due: August 2027 or on legislative change.