There is no doubt COVID-19 has hit our economy hard, but in the midst of recession, there has been an unexpected winner, the housing market in South Australia is stronger than ever. So, as everyone rushes to enter the market, loans to family and close friends may just be what you need to put you ahead of the pack. Tempting? Of course. But, is the shortcut worth the potential long-term strain on relationships that could be caused by informal loans going wrong?
Before jumping to open your wallet to your child, a family member, or even a close friend, take some time to consider some overlooked aspects, and prepare a loan agreement.
It doesn’t cost much and saves plenty if the relationship was too sour, or change. Parents and children usually trust each other to do the ‘right thing’, but sometimes it’s not your children you should think about, but their partners or spouses. Also, sometimes your child’s brothers or sisters may have concerns with the loan being provided.
The biggest advantage of a drafted loan agreement is that everyone involved should know where they stand. This is particularly important if there is a marriage breakdown, or de facto separation of either party if there is bankruptcy, or in the unfortunate event that one of the parties dies. The loan agreement would ensure that the loan is not mistaken as a gift, which is an important difference. A lawyer drafts the document to protect everyone involved
While an oral agreement binds parties the same way a written contract does, an oral agreement is much harder to prove.
Also comments like, “Pay me back when you can” can very quickly turn into “I need you to pay me back right away”. In a time where job security is low and unemployment is high, these are very real considerations which should not be brushed aside. Likewise, one party may have thought that certain terms were mentioned, but they weren’t. Sometimes the loan might be thought to be a gift when vague or uncertain terms lack clarity a Court may consider your loan is to be a gift. This could bring financial strain to family relationships if, for example, parent’s hard-earned money gets lost in a property settlement with your ex-spouse. Alternatively, as a gift, a child could gain additional funds from the money already provided to them, as well as a distribution from an estate. A lawyer can help you with precise information, to form your loan agreement.
A loan agreement does not have to be complex, but should cover the following:
- The amount of the loan;
- How repayments will be made;
- If interest is to be charged and how;
- The term of the loan;
- Whether there is security over the loan.
- A lifetime clause in the lender’s Will
Have you already lent the money? We can still help. A retrospective loan agreement may still be an option for you and is better than no agreement at all.