Lending money to friends and family members is a personal decision, but if you are lending money to a friend or family member then we strongly recommend that the person loaning the money (‘the Lender’) and the person receiving the loan (‘the Borrower’) enter a formal, written, loan agreement. Upon execution, a loan agreement forms a legally binding document which records the terms and conditions of the loan.
The agreement will include all the important terms, such as:
- the timeframe and method of repayment of the loan by the Borrower to the Lender;
- whether any interest will be payable by the Borrower to the Lender and, if payable, the terms in which the interest shall be paid;
- what happens if the Borrower defaults on the terms of the loan agreement, including not meeting the payment terms; and
- whether the Lender will be obtaining any security from the Borrower to secure the amounts owed to it.
The agreement will provide protection to the Lender in case the Borrower default on the loan repayments.
The written loan agreement will serve as evidence that money has been advanced by the lender and defines how much of it is available for repayment. Therefore, if there are any disputes between parties during their term on this contract, then the loan agreement will serve as evidence to assist in resolving the dispute.
For any loan, we also recommend that the loan be secured against an asset(s) such as a house, a car or equipment which belongs to the Borrower, and/or a guarantor which has been named in the loan agreement, known as a security. The amount of the loan will determine the value of the security that will be required.
The security interest must be provided in writing and agreed to by the Borrower. Normally, the security interest will be registered against the asset which prevents the Borrower from selling the asset without first dealing with the amounts owed to the Lender. For example, if the loan was for the purchase of a house, and the Borrower agrees to provide the house as security to the Lender, then the parties could enter a mortgage that is registered on the Certificate of Title of the house. The house cannot be sold without the mortgage being discharged (which means the Lender being paid in full).
Other types of security, such as cars, goods or company assets, will usually be registered on the Personal Property Securities Register (PPSR). The PPSR is a public register that lets people know if personal property has security interests over them. Thus, making them less desirable to any potential purchasers of the asset before security interests are satisfied. The PPSR can help people avoid buying an asset that has a security interest over it, or at least be aware that they may have to take on responsibility for satisfying that interest before they can gain full ownership of the asset. In some cases, the PPSR may even help people get a better price for an asset by letting potential purchasers know that there are no outstanding security interests over the asset. Ultimately, the PPSR is a valuable tool for both buyers and sellers of personal property.
As a lender, it is critical that you take steps to protect your interests when entering into a loan agreement with a friend or family member. While a verbal agreement may be legally binding, it can be difficult to enforce in court. Moreover, an informal agreement is likely to lack important details about the terms of the loan, including the repayment schedule and interest rate. By contrast, a written agreement will spell out all of the important terms of the loan and will provide both parties with a clear understanding of their rights and obligations. In the event of a dispute, a written agreement will also be much easier to enforce in court. For these reasons, it is always best to get a written agreement in place before lending money to a friend or family member.
Feel free to contact one of our specialist lawyers for a no obligation discussion.
This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you. Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.