With interest rates rising and the cost of living being driven up, more and more Australians are considering taking loans from family members or friends in an attempt to skip the increased expenses of the banks. While this is a popular practice, it is worth noting that despite the money coming from family or friends, you should still consider getting a contract drawn up in the event that things go wrong. But how do you draw up a loan contract with a family member or a friend, and why is it so important?
Why do people get family loans?
The most common reason people get a loan from a family member or a friend is to avoid paying interest rates on borrowed money they would otherwise obtain from banks. Parents want the best for their children, and often money is loaned from parents to children as means of assisting them in obtaining their first home. Similarly, friends often wish to help each other. This is usually very common and could be considered a simple task.
There are many things to consider when establishing a family loan agreement or a loan between friends, including;
- The amount for the loan
- If any interest is expected to be paid
- The timeframe for repayment and the amount of those repayments
- The parties expectations
- The period of the loan
- If any security is to be given in return for the loan, and
- Who the loan will be made to
Is it a loan or a gift?
Before any money is transferred, it is first essential to establish if the money is being sent as a loan or as a gift. If it is being sent as a loan, it is important to have an agreement in writing so that both parties have certainty about their expectations if the relationship deteriorates. The written agreement will stipulate the expected payment amounts and timeframes, along with other essential terms of the bargain.
If you are sending the money as a gift, you may still want to consider drawing up a loan in writing with a clause on payment expectations should you at some stage later fall into financial hardship and require repayment of the loan. It is important to prepare for future uncertainty. Should you in the future require repayments, failure to draw up an agreement will make it difficult to recover those funds as it will be unclear what the intention of the parties was at the time that the funds were transferred.
It is also worth noting that both parties should take advice from a registered accountant to understand the tax considerations for family loans or loans between friends.
Is there anything else to consider?
One of the most important things to consider is what happens to the loan should either party pass away during the term of the loan. You might express in the terms of your loan what will happen in the event of your death. This may affect whether or not the loan is an asset of your estate to be distributed in accordance with your will. What would happen if your child splits from their partner during the period of the loan, would repayments change, or the loan be amended to different terms?
Get an agreement drawn up by a qualified lawyer
As you may have already established, there are many different circumstances which can arise when it comes to obtaining and establishing a loan agreement between family members and friends. Family loans and loans between friends and loan agreements can be very complex and different terms may be required depending on your particular circumstances and intentions. For this reason, it is highly recommended that you engage with a lawyer when committing to such agreements. Here at KLD Legal, we can assist in drawing up family loan contracts and loan agreements between friends in a fashion that makes the agreement and expectations clear for both parties, and protects your money should the worst happen.
Here at KLD Legal, we are experienced in drafting contracts. We take the time to understand your concerns and are able to discuss the details in a way that ensures that any loan agreement is written into a contract that is easy to understand – and covers all bases, whilst advising you of your rights and legal obligations. Contact us today to assist with your family loan agreement or loan between friends.