Family loans are not uncommon. When a loved one needs help financing a new business, purchasing their first home or overcoming financial difficulties, it is natural to want to help out as much as you can. However, this does not mean that you have to put yourself in an uncomfortable position and run the risk of stressing family relationships. Law Central can help you structure a family loan and be savvy about it.

Why should I have a loan agreement?

Having a loan agreement in place will provide you and your family members with certainty and make both of your expectations clear. This can prevent family disputes and put you at ease knowing that you can enforce your agreement. Although your family members might not expect a loan agreement it can benefit them too. It shows the rest of the family that they are serious about repaying the loan and can prevent jealousy arising.

When things turn bold and beautiful: Liakos V Zervos & Anor [2011] FamCA 547

When family relationships breakdown, the last thing you need is to have to fight for repayment. Gold and Platinum members read on to see what happens to family loans in times of divorce.

What should a loan agreement contain?

The terms of your family loan agreement are up to you. However, it is absolutely necessary that the terms of the loan are specific. Make sure to cover whether interest is payable and the dates for repayment. The loan documents should also be signed and dated and each party should retain a copy. If the agreement is vague or uncertain, you run the risk of not being able to enforce it!  

Depending on the circumstances, you might want the loan to be on commercial terms. Interest rates can be fixed, variable or even pegged to the home loan rates of a commercial bank. If you are concerned about being repaid promptly you may even consider a higher interest rate should your family or friends default on payment.

If you plan to loan a lot of money you would be wise to secure the loan in some way. If you have helped a loved one purchase a home, you should support the loan with a mortgage or place a caveat over the property. A mortgage is a more prudent choice, as a caveat will not prevent the property being sold. Caveats simply prevent the property being dealt with without your knowledge which can buy you some time to protect your interests. Another option is to secure the loan with personal property from the borrower. If you are unsure of how to structure any of these securities, obtain legal advice.

Do I need to consider other legislation?

If the agreement is simply a loan agreement between family members it is unlikely it will be impacted by the Consumer Credit Code or the Personal Property Securities Act 2009 (Cth).

Law Central has developed a loan agreement to make sure you are covered when making family loans. Click here to build this document now.