Loan Agreements between Family and Friends

Oral agreements (or homemade written agreements with vague or uncertain terms) are unlikely to be enforceable, and in Australia the loan is presumed to be a gift if there is no loan agreement in place. A formal loan agreement protects the lender and the borrower. It increases the chance that you will get your money back if the borrower enters family law proceedings or bankruptcy.

Family Law Property Settlements
It is not uncommon for loans from family members or friends to become an issue of dispute in Family Law proceedings.

Liakos and Zervos and Anoy [2011] FamCA 547
The husband argued that he owed his father a principal amount of $587,000.00 plus interest which was loaned to him in separated transactions over a number of years. However, the wife disputed these loans.

The Court found that the loans were not previously enforced by the father (the lender) and were not expected to be. The steps taken by the father to enforce the debts appeared to coincide with the wife’s application to the Court to divide the assets between the wife and husband.

Normally, in Family Law a court will distribute the net value of assets between the parties after the debts have been deducted. In this situation the loans from the father were not included as a debt to be deducted. Therefore, there was a significantly larger amount of money to be divided between the husband and wife without repayment to the husband’s father. The wife received a share of the money the husband believed was owed to his father.

Loans can have implications on Family Law proceedings, so it is important to have the right documents in operation to avoid this as much as possible.

What should be in a loan agreement?
A written loan agreement has to clearly set out the obligations of the parties, particularly the borrower’s obligation to repay the loan. A simple written loan agreement can contain the following terms.

1. The amount of the loan (the principal).
2. Interest (if to be charged, the rate and how to be paid).
3. The term of the loan (when the loan is to be repaid).
4. How the loan is to be repaid (lump sum, instalments).
5. Method of repayment (cash, direct credit, bank cheque).
6. Security for the lender (if the loan is to buy personal property, the lender may be able register an interest on the Australian Government Personal Property Security Register).

If you want to loan someone money or find out more about your rights and options, Straits Lawyers are here to help. We are now offering online services in both English and Chinese.

Please note that this article does not constitute legal advice and Straits Lawyers will not be legally responsible for any actions you take based on this article.