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The Do’s And Don’ts Of Lending Money To Family And Friends.

The do’s and don’ts of lending money to family and friends.

Thinking of loaning money to family or friends? Read this first to help you protect yourself and your personal relationship.

As the COVID-19 pandemic takes its toll on the economy, it is not uncommon for family and friends to make loans or payments to each other to help out. However, the informal nature these transactions can make recovering payment more difficult and more damaging to the personal relationship.

Before providing money or paying a debt on behalf of a family member or friend:

Do

1. Make it clear whether the money is a gift (which is not repayable), or a loan to be repaid;

2. Record the critical terms of any loan in writing – the parties to the agreement; the amount loaned, the date for repayment and any interest charges to be paid. For a larger sum, a formal loan agreement prepared by a solicitor is a worthwhile expense to ensure a valid and binding agreement is reached, that can be enforced if necessary;

3. For larger sums, consider whether any security should be provided by the borrower;

4. Keep a written record and evidence of the sum loaned and amounts repaid.

Don’t

1. Rely on informal or verbal assurances or agreements about the transaction. It is not uncommon for a dispute to arise over whether the money was intended to be a gift (which does not have to be repaid) or a loan;

2. Agree to vague and uncertain terms about repayment – such as the borrower can repay the money when they can afford to do so. Ascertaining when that point in time actually occurs, and so when repayment is actually due, can be difficult;

3. Lend money if you would be unwilling to sue to recover the debt if necessary, unless you are prepared to accept the possibility the funds may never be repaid;

4. Assume the other party will act in good faith and do the right thing, just because they are a relative or a friend. Formalising the arrangement in writing provides certainty to both parties.

If you would like advice on recovering payment, or assistance to properly document your proposed transaction, you can contact us by telephoning our office on (07) 3220 2929 or emailing us at contact@plastiraslawyers.com.

About Kathleen Anderson

Kathleen Anderson is a Senior Associate in the Dispute Resolution team at Plastiras Lawyers.  Kathleen helps SMEs prevent and resolve disputes arising in their day to day businesses.  Her expertise includes advising businesses on contract breaches, partnership disagreements, debt disputes and negligence claims.

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