When a loved one is in need, the first thing you want to do is lend them a helping hand. But when that help comes in the form of a monetary loan, there are a few legal things you should know.
Inter-family loans are usually done in an informal way. One family member is either lending or borrowing money to another family member, perhaps to buy a new car, go on an overseas holiday, pay for a wedding, or more often than not cover a housing deposit.
But what you may not realise is that any time this is happening you are actually raising important legal issues.
When loaning or borrowing money, transactions should always be recorded in writing so everyone involved has a clear understanding of the situation. When family emotions are potentially involved, the certainty of a document is essential.
There doesn’t need to be a ten-page document, it can be as simple as a few pages that set out everyone’s rights and obligations; and clearly stipulates that the money in question is a loan, and not a gift, which can avoid a lot of trouble in the future.
For example, when there is no written agreement the borrower may say down the track that they thought it was a gift and didn’t realise it needed to be paid back.
This can also be a particular problem for an executor when dealing with the estate of a deceased person and trying to decide whether the payment of money during their lifetime was a loan or a gift.
What should be in a loan agreement?
A written loan agreement does not have to be complicated document. It just has to clearly set out the obligations of the parties, particularly the borrower’s obligation to repay the loan. A simple written loan agreement can contain the following terms.
1. The amount of the loan (the principal).
2. Interest (if to be charged, the rate and how to be paid).
3. The term of the loan (when the loan is to be repaid).
4. How the loan is to be repaid (lump sum, instalments).
5. Method of repayment (cash, direct credit, bank cheque).
6. Security for the lender (if the loan is to buy personal property, the lender may be able register an interest on the Australian Government Personal Property Security Register)
Whether it’s a small amount of money or a large sum of money, the most important thing when lending and borrowing within the family is to protect yourself financially, and also protect the relationship with your family member.
Being clear about the terms of the agreement, particularly in writing, will go a long way towards a trouble-free transaction.
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