Dear Clients and Friends,
Protecting Your Loan - especially to friends or relatives
I have many clients who have lent money to friends, family, or business associates which can be a generous and practical gesture. Often parents and siblings lend money to assist family members obtain a property or for some other reason. However, without the right safeguards, it can quickly become a source of conflict and financial loss. This often occurs in marital disputes and upon the death of a lender, where a loan is disputed as a being a gift. To ensure the ability to either recover or have proof of its existence, it is necessary when lending money for whatever reason, to have a clear and enforceable agreement.
Here are the key elements required to establish proof of the existence of a loan and not as a gift, or to secure a judgment to recover the lent funds:
Create a Written Loan Agreement
While verbal agreements may be legally binding, they are notoriously difficult to prove in court. A written loan agreement is vital as it provides clear evidence of the loan’s existence and terms. Ensure the agreement includes:
The names of the lender and borrower (full legal names).
The loan amount (principal sum).
The purpose of the loan (if relevant).
Repayment terms, including:
i. Payment schedule (e.g., instalments or lump sum).
ii. Interest rate (if applicable) and how it is calculated.
iii. Due dates for payments.
iv. Consequences of default, such as additional interest or penalties.
Clearly Define the Loan as a Legal Debt
To prevent disputes over whether the money was a loan, a gift, or a repayment, the agreement should explicitly state that the funds are a loan. Avoid vague language and ensure both parties acknowledge the nature of the arrangement.
Include a Signed Acknowledgment
Both the lender and borrower should sign and date the agreement. Ideally, signatures should be witnessed by an independent third party to strengthen its enforceability. In some cases, having the agreement notarized or signed before a Justice of the Peace can provide added security.
Retain Proof of the Loan Transfer
Document the transfer of funds with evidence such as:
Bank statements showing the loan amount transferred to the borrower.
Receipts or acknowledgment letters from the borrower.
This proof can be invaluable if the borrower disputes the claim in court.
Security
If you are lending to assist another buy a property or expensive item, it is preferable that you secure the loan over that property or item. This can be achieved in several ways depending upon the purchase.
Consider Adding a Guarantee
If you’re lending to a business or a borrower with limited financial resources, you may want to include a guarantor. A guarantor agrees to repay the loan if the borrower defaults. Ensure the guarantee is included in the written agreement and that the guarantor signs it.
Specify Interest Rates and Comply with the Law
If you’re charging interest, ensure it complies with the law and is not excessive. Under the Uniform Consumer Credit Code, lenders must avoid unfair terms that could render the agreement unenforceable.
Include a Dispute Resolution Clause
To prevent lengthy legal disputes, include a clause outlining how disputes will be resolved. For example, the agreement might specify mediation or arbitration before proceeding to court.
Seek Legal Advice
Lending money is a financial risk, and the legalities can be complex. Having us at JCL Legal draft or review your loan agreement ensures that all necessary legal elements are included and the document is enforceable under the law.
Forgiveness
It is always possible for a lender to forgive any term of a loan agreement, should they so wish.
By following these guidelines, you can significantly improve your chances of recovering lent funds, should a dispute arise. A well-drafted agreement not only protects your financial interests but also helps maintain your relationship with the borrower by ensuring transparency and fairness.
If you, or someone you know, are considering lending money or need assistance drafting a loan agreement, please contact me. Our team is here to provide tailored advice and ensure your interests are safeguarded.
Wishing you a wonderful day,
Jeffrey Choy
JCL Legal
0419 233 670
[email protected]
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Legal Disclaimer: This guide is for informational purposes only and does not constitute legal advice.
