Lending money to family or friends?

A $250 loan agreement could save you thousands (and damaged relationships).

It’s common when people lend money to their family or friends to think of it in less formal terms than a loan to a stranger or an acquaintance. Most of the time, nothing will go wrong. But when it does (and it does sometimes!), not having a written loan agreement that clearly deals with the circumstances of the loan, and failure to repay, can be costly and stressful, involving litigation and sometimes permanently damaging relationships.

A simple loan agreement gives both parties certainty as to the fundamentals of the loan: how much, what is it for, and when and how it is to be repaid. But there are other considerations. For example:

  •         Should an interest rate apply in the event of default on repayment, to ensure repayments are made on time?
  •         If the borrower consistently misses payments, should the lender be entitled to require the whole balance of the loan be repaid?
  •         Should some security over real or personal property be put in place, to mitigate risk to the lender?
  •         Who are the correct borrowers, especially if the loan is for a business purpose, and should guarantees be in place?

There are also a number of other considerations, where good preparation in the first place can avoid an ugly dispute in the future.

Further, a loan you make is ordinarily an asset of your estate, so estate planning should be considered, about how the loan is to be treated in your will.

Give one of our experienced lawyers a call to see how a small investment can reduce your risk.

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