Renee Stevens from SRM Lawyers (located in Lane Cove)ITC’s legal eagle and she gives us the run down on what to do when you lend money to family and friends. After all, what could go wrong……..???? Take it away, Renee.
Picture this scenario – a close relative or friend is going through a tough time financially or they’re starting a new business and they approach you to borrow money. You’re not comfortable with the request but you feel awkward saying no, so you reluctantly hand over the cash, never to see it again. From that time on, you feel resentful and used and family get-togethers have become painfully uncomfortable.
Whilst lending money to family or friends is a common occurrence, it’s important that it’s done correctly. All too often we talk to clients who have lent money in such a vague and unstructured way that it makes it almost impossible to recover the money if the person doesn’t pay it back.
Here are our top tips that you should consider before opening up your wallet, so that you don’t get caught out financially or emotionally.
Lend only what you can afford to lose
Your friend or family member may be trustworthy and reliable with the best intention to repay the money but things can happen that prevent them from paying you back as originally planned. If your friend or relative strikes financial difficulties, it’s likely that they will focus only on repaying their bills, mortgage and credit card debts. Only give an amount that, if never repaid, won’t affect your own financial obligations, savings goals or other relationships.
Create a repayment schedule
Loans to family and friends have a tendency to be open-ended. The lender doesn’t know when their money will be returned and the borrower doesn’t know when to repay the loan. Without a deadline, repaying the loan may become the borrower’s lowest priority and it can be difficult for the lender to request repayment. If you create a clear timeline for repayment, there can also be no doubt that the money was intended as a gift. A loan must be repaid; a gift does not.
Set out the loan terms in writing
Whilst an oral agreement binds the parties in the same way that a written agreement does, proving the existence of an oral contract can be difficult and can come down to your word against the borrower’s. A written agreement signed by all parties takes away any doubt that a loan arrangement was intended and if the borrower is genuine, he or she should be happy to sign it.
At a minimum, a loan agreement should include the amount of the loan, any interest to be charged, the term of the loan and how the loan is to be repaid.
You can draw up a simple document yourself if a small sum is involved, but it’s usually best for a lawyer to draft the loan agreement to minimise the chance of future disputes or if another person will guarantee repayment.
Consider taking a security interest over assets
Depending on the sum involved and the purpose of the loan, it may be appropriate to take a security interest over the borrower’s personal assets, business equipment or land.
If you lend money to someone for the purpose of purchasing property, a mortgage can be registered on the property’s title which means that your financial contribution to the property is protected – it cannot be sold unless the mortgage is discharged. Say you lend money to your son or daughter to enable them to purchase their first property and they later marry or enter into a de facto relationship which ultimately breaks down, the equity in the property will be reduced by the amount of your mortgage, which may better protect your child in a family law property settlement.
To sum up …
Because of your personal relationship, you may choose not to enforce the terms of the loan agreement strictly but putting it in writing may make the borrower take the loan more seriously and will ensure that everyone involved understands their rights and obligations.
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This is advice of a general nature, this article does not constitute legal advice and is not meant to be complete or exhaustive.
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