Lending to family and friends – the Golden Rule

Lending money to a friend or family member to help out in a time of need will no doubt win their gratitude in the short term, but it can also cause rifts that last forever.

The Golden Rule when lending money to family or friends is “always have a signed and dated written loan agreement”.

Loan vs gift

Giving a person money can be either a loan or a gift. A loan has to be repaid; a gift does not.

In your eagerness to help out a desperate friend or relative, you might give them money without being absolutely clear that it is a loan. The conversation can go something like “No, no. You take the money. We’ll work something out later”.

When the time comes to pay money back, borrowers often conveniently forget conversations about repaying money loaned to them.

Having the loan agreement in writing can refresh a borrower’s memory.

Recovering your money

An agreement to advance money as a loan is a contract between the lender and the borrower. A contract made orally is just as binding as a contract in writing. However, it can be difficult to prove the existence of an oral contract. It is likely to be your word against the borrower’s whether the money was a loan or a gift.

A written agreement signed by the parties will assist the Court in deciding that the money was a loan.

Don’t be shy

If a borrower is genuine, they should not have any objection to documenting a loan.

What should be in a loan agreement?

A written loan agreement does not have to be a 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).