Lending money to family: agreements and interest

Money given to a family member is a loan, not a gift, if it has to be paid back. That single test decides almost everything that follows: whether a mortgage lender will accept the money as a deposit, whether the arrangement needs to be written down, and what happens when repayments stop. There is no legal requirement to put a family loan in writing, and no rule that says you cannot charge interest, but both choices change how the arrangement behaves if it goes wrong.

If you would rather borrow from an institution than from a relative, credit unions run Family Loans repaid directly out of Child Benefit. The amounts are small and vary widely: one credit union lends £250 to £999 to members repaying by Child Benefit¹, another caps a Family Loan at £500 where Child Benefit is paid straight to the credit union², and one advertises Family Loans of up to £1.5k for people receiving Child Benefit³. Most credit unions lend small sums of around £50 to £3,000⁴.

When money from family counts as a loan

The dividing line is repayment. Money you are expected to give back is borrowing from family or friends, however informally it was handed over⁵. Money you are not expected to give back is a gift, and lenders treat the two completely differently.

That matters most when the money is helping someone buy a home. A gifted deposit from a family member can be accepted towards a property purchase where the person providing it is a relation by blood or law, or where you are in a relationship and living together⁹. Where the money is a gift, a mortgage lender may ask for proof of where it came from and a letter confirming it will not be repaid¹⁰. A loan dressed up as a gift creates a problem at exactly the wrong moment, because the lender is assessing whether the buyer can afford the mortgage on top of the repayments they have privately agreed.

For the person lending, the money is an asset that has left their control. For the person borrowing, it is a debt that sits outside any credit agreement, which means it will not appear on a credit file and will not be picked up by an affordability check. That is one reason family lending is common and also one reason it goes wrong quietly.

Putting a family loan agreement in writing

There is no legal duty to write a family loan down. Business partners are in the same position: by law they do not have to have a written partnership agreement, though they may decide it is a good idea to have one⁶. The same logic applies here. A written record does not make the loan more real, but it makes the terms clear while everyone still agrees on them.

Where people do put arrangements in writing, the pattern is a short document setting out the amount, the repayment schedule, and how the arrangement can be brought to an end. A lodger agreement works the same way: it is a good idea to have a written agreement setting out rent, deposit, house rules and how the agreement can be ended, signed and kept by both parties¹¹. A family loan agreement can be as simple as that.

If the intention is for the agreement to be enforceable through the courts, writing it down is not enough on its own. To make an agreement legally binding in that sense, you need to draft a consent order and ask a court to approve it¹². That is a formal step most family loans never take, and it is worth knowing that a signed note between relatives is evidence of what was agreed rather than a court order.

Charging interest on a loan to family

Interest is the amount charged for borrowing money, shown as a percentage of the total amount of the loan⁷. Nothing prevents two private individuals agreeing that a family loan is repaid with interest, and nothing requires it either. What matters is that both sides understand the total cost before the money moves.

Interest changes the size of the debt, and it compounds the awkwardness if repayments slip. A useful comparison is how formal lenders handle it. On a bridging loan, interest is charged monthly but rolled up and repaid in a lump sum at the end, along with the initial loan price and any fees and charges¹³. On a loan charge settlement, you pay interest when paying by instalments, and a new settlement offer including the interest is sent out¹⁴. In both cases the borrower can see the total. A family arrangement where interest is mentioned once and never calculated leaves the borrower guessing.

There is also a boundary to watch. Adding extra money or interest to a debt you are already owed, telling other people about it, losing your temper or using threatening language can tip a private arrangement into behaviour that breaks the law⁵. Charging interest is not the problem; how the debt is pursued can be.

Credit union Family Loans: £250 to £1,500 repaid through Child Benefit

A credit union Family Loan is a small loan repaid out of Child Benefit, usually paid straight into a credit union account so the repayment comes out before the money reaches the household. The amounts differ sharply between credit unions, which is the single most useful thing to know before comparing them.

The pattern across these is a first loan of a few hundred pounds, with a larger amount unlocked once earlier borrowing has been repaid. One credit union describes a £500 or £1,000 loan for Christmas or a holiday repaid over 1 year from Child Benefit²³. Another lends up to £750 to members who have Child Benefit paid into a credit union account, on proof that they receive it²⁴.

Eligibility is usually about membership rather than credit history. One Family Loan requires a bank account for payment of the loan²⁴, and another says other members may qualify if they can show they meet certain financial criteria²⁵. Repayments are typically taken from an agreed benefit paid into the credit union account, with part of it used to make the loan repayment²⁶.

How long a Family Loan lasts, and topping it up

Terms are short. One Family Loan is repaid over 7 months, with top-ups available from week 24²⁷. That is a much shorter horizon than a personal loan, and it means the monthly repayment is a larger share of the money borrowed.

Top-ups are where credit unions differ most, and the difference is not always visible until you ask. One credit union stopped permitting Family Loan top-ups from September 2024, requiring the loan to be repaid in full before applying for another £300 Family Loan or continuing onto its regular loan policy²⁸. Others build top-ups into the product from the start.

There is a wider limit worth knowing. If you are a member of a credit union, you can usually borrow at least two or three times the amount you have in savings, depending on that credit union's loan policy²⁹. Credit unions lend small loans of around £50 to £3,000⁴, and offer personal loans of up to about £3,000⁸. A Family Loan sits at the smaller end of that range.

Does a Family Loan affect your credit file?

Credit unions say it can help. One states that if you take out a Family Loan and keep up with the repayments, this will help to improve your credit file³⁰, and another invites members to start building their credit score with a Family Loan³¹. Those are the providers' own claims about their own products.

The broader mechanism is saving. If you join a credit union and start saving with them, you will also be able to apply to borrow money once you have proved you are a reliable saver³². That is a different route to creditworthiness from a credit score, and it is one reason credit unions suit people who have little or no borrowing history.

A family loan made privately does none of this. It is invisible to credit reference agencies, so repaying a relative on time builds no credit file at all, and missing a payment to a relative damages nothing on paper. The consequences are personal rather than financial.

What can go wrong, and where to get help

The main risk is that the money is not repaid and the relationship absorbs the loss. Chasing it is delicate: adding extra money or interest, telling other people about the debt, losing your temper or using threatening language can make the other person avoid you, and could even break the law⁵.

There are safer ways to borrow than from family or friends, and they are worth knowing before a private arrangement is agreed. These include credit union loans, using an authorised overdraft, loans or help from a local authority, a wage advance from your employer, and a budgeting loan or advance from the Department for Work and Pensions if you receive benefits⁵. Credit union borrowing is covered in more detail in credit union loans, and community lenders in CDFIs and affordable credit.

If a family loan has already gone wrong, the options depend on who is struggling. Where the borrower cannot repay any borrowing, free debt advice services can set out the choices, and what to do if you can't repay a loan covers the process. Where the problem is a lender rather than a relative, complaining about a lender explains how the Financial Ombudsman Service fits in.