Lending Money to a Friend, No Matter How Trusted, Carries Serious Risks

No matter how much you respect and trust your friends, lending them money can be fraught with risk and should never be done without first taking professional advice. A case on point concerned a couple who lent £210,000 to a neighbour to help him fund an overseas business venture.

The loan was advanced to the neighbour and his business partner and was secured by way of mortgage against the latter's home. The money was intended to provide short-term bridging finance and was repayable after 120 days, together with 20 per cent interest, or £42,000. In the more than seven years that had passed since the loan was advanced, no repayment had been made.

The couple launched proceedings against the neighbour, seeking repayment of the loan plus interest of more than £1.5 million. They asserted that such interest should be calculated, on a pro rata basis, at £700 per day, or an annual rate of almost 122 per cent. Alternatively, they contended that 20 per cent interest became payable at the end of each 120-day period of default.

Ruling on the matter, the High Court rejected the neighbour's argument that the couple had given him a binding oral assertion that they would take no action against him before taking steps to enforce the debt against the security of his business partner's home. He was jointly and severally liable to repay the debt.

Turning to the interest issue, the Court noted that the loan agreement was silent as to how future interest would be calculated in the event of default. The couple's plea that they had entered into an informal, yet enforceable, agreement with the neighbour that he would pay interest at a daily rate of £700 was rejected.

The Court ruled that the neighbour should be required to pay interest at the statutory annual rate of 8.5 per cent. That was a fair and just percentage which far exceeded prevailing market lending rates during the relevant period.