How to make a loan without ruining a relationship
Lending money to friends/relatives/colleagues can end in tears. Consider this scenario:-
Lending money to friends or relatives can be a risky activity. Putting the arrangement in writing allows each party to know where they stand and stops potential problems.
“Two years ago, I lent my brother $2,000. Lately, I have tried to discuss repayment but keep getting excuses and he is now avoiding me. This is putting a lot of stress on me and the family, and I don't know what to do”
This puts the lender in an unfortunate situation.
If the loan amount is not repaid as agreed, they will be forced to take action if they wish to recover the monies owing. The procedure would usually involve issuing a “Letter of Demand”, and if payment is not forthcoming, initiating court proceedings.
An action can be made in the small claims division of the local court, for amounts of less than $10,000 depending on your state. This is a relatively simple and informal process. Otherwise, the local court’s general division will deal with larger amounts. For amounts over $100,000, District or Supreme Court proceedings must be instigated.
How to reduce risk when making a personal loan
One of the ways that both a lender (and borrower) can protect themselves and lessen the risk of dispute or misunderstanding, is to clearly document the loan transaction, including all of the terms they are agreeing to, such as:-
- The loan amount;
- Other fees or charges;
- The interest rate;
- Repayment date/s;
- The due date of whole amount;
- The term of the loan;
- Will the Lender require a guarantee;
- Will the Lender take security over assets; and
- What shall happen in the event of default.
Putting it in writing provides clarity
Putting your agreement in writing before lending money – even to a close friend or family member – is a simple step to help ensure that all parties have read, understood and agreed to the terms of the personal loan. Even the seemingly small details are set out, such as what will happen should the borrower default. Such clauses may in fact prove to be vital.
You can enter into a very simple loan agreement, or create a more complex agreement depending on your needs.
Having a written agreement gives you evidence of the loan, should things go sour. It will enable you to readily prove the nature of the transaction in court or tribunal proceedings.
A loan can be hard to prove if based on a verbal agreement, or it may be disputed as being a gift or otherwise by the recipient. Having a signed agreement in place eliminates these issues.
What are unsecured loan agreements?
An unsecured loan agreement is a simple loan agreement used to document the terms of a personal loan.
It will ideally contain all of the terms and conditions which the lender and borrower have agreed to. It will set out the rights and obligations of both the lender and borrower and what will happen should a party not fulfil their responsibilities.
The loan agreement should be signed by both the lender and the borrower, and both parties should receive a copy of the fully signed agreement, and store it away in a safe place.
It is a document that can be relied on in a court or tribunal, to evidence the loan, should things not work out as planned.
When can they be used?
This simple unsecured loan agreement is suitable for loans of a personal and/or private nature.
Some examples of where an unsecured loan agreement can be used are:
- Loan to your adult children, or other family members;
- Loan to friends where no security is being taken;
- Loan to employees, colleagues or business partners;
- Loan by a shareholder to the company;
- Loan to your business or company.
This agreement is not suitable for
The simple loan agreement is not suitable for transactions which the National Credit Code applies: that is, where the lender provides credit as part of, or incidental to, their business (among other things). For more information about whether the National Credit Code applies to you, refer to ASIC’s information page here.
If a company is lending funds to a director or shareholder of the company, refer to the Division 7A Loan Agreement.
If security (not land) is being taken for a personal loan, refer to the Secured Loan Agreement.
By Ian MacLeod