There is no doubt COVID-19 has hit our economy hard, but in the midst of the 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, family loans or loans to 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 opening your wallet and lending money 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 to sour, or change. Parents and children usually trust each other to do the ‘right thing’. However, sometimes it’s not your children you should think about, but their partners or spouses, especially if they are sharing a bank account. Also, sometimes your child’s brothers or sisters may have concerns with the family loan being provided.
The biggest advantage of a drafted loan agreement is to make sure that everyone involved knows 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 family loan is not mistaken as a gift, which is an important difference. A lawyer drafts the document to make family loans safer and more secure for all parties involved.
While an oral agreement between family members 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 that should not be brushed aside. Likewise, one party may have thought that certain terms were mentioned, but they weren’t. Sometimes the family loan might be thought to be a gift if the terms are vague or uncertain. When family loans lack clarity, a Court may consider your loan to be a gift. This could bring financial strain to family relationships if, for example, the 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 with a family member, whether you are lending money to or borrowing money from family.
A loan agreement does not have to be complex, but should cover the following:
- The amount of the loan;
- How repayments will be made;
- The interest rate (if applicable) and how it is charged;
- The term of the loan;
- Whether there is security over the loan;
- A lifetime clause in the lenders 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.