Consider the following scenario:
Tom has just finished university and has decided to move out and buy himself a unit. He is unable to get finance from the bank, so he asks Dad to lend him some money. Tom promises Dad he will pay interest on the loan, and repay it in full when Dad asks for the money back. Dad agrees, and gives Tom the money. Neither Dad nor Tom seeks legal advice about the loan, and nothing is put in writing or signed.
This is not an uncommon scenario. Many Australians lend money to their children, siblings or friends without consulting a lawyer and documenting the arrangement. Unfortunately, what is intended as a kind gesture can easily backfire and have unintended, and sometimes devastating, consequences.
If you don’t document your loan arrangement properly, you expose yourself to the risk of financial loss, and serious damage to your relationship. For example:
- it may be hard to prove that you intended to make a loan, as opposed to a gift
- you may not share the same understanding of the terms of the loan as your borrower, and this uncertainty may make it harder for you to enforce your right to payment
- you may not be able to rely on any enforceable security if your borrower defaults.
Don’t risk suffering financial loss and destroying your relationship with your loved ones. If you have lent, or are thinking of lending money to a family member or friend, we can help you to help your loved one and protect yourself, without unnecessarily jeopardising your relationship.
If you come and see us, we will sit down with you and explain the risks, help you to negotiate the terms of your loan (including appropriate security), and prepare a loan agreement which:
- clearly sets out the agreed terms of the loan, including the amount of the loan, how much interest is payable and when, how and when the loan will be repaid, and what happens if the borrower defaults; and
- provides for security to protect you in case the borrower defaults (for example, a personal guarantee, a charge or a registered mortgage).
This bulletin is provided for general information purposes only. Each person’s circumstances are different and the information contained in this bulletin should not be relied upon as a substitute for legal advice
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