Lending Money To Family And Friends (Qld)
It is fairly common for people to lend money to family and friends. This is especially true in recent years when the price of real estate in Australian capitals has made the “bank of mum and dad” one of the largest providers of mortgage funds. Unfortunately, these arrangements can quickly become complicated if the borrower cannot repay the loan. However, there are ways to make loans to family and friends safer for all parties. This article explains the legal implications of lending money to family and friends in Queensland. It also offers some practical tips for protecting yourself when lending money to family or friends.
Written Loan Contracts When Lending Money
It is always best to formalise a loan agreement in writing. The parties should work together on the contract terms, so there is no disagreement in the future. A written agreement should clearly indicate that the monies are a loan and not a gift. It can be difficult to prove that the funds were a loan with the expectation of repayment if there is nothing in writing.
A good contract about lending money will have terms and conditions that apply to the loan repayments. The documentation should specify the repayment schedule and what happens in case of a missed payment. For instance, the contract could state that the borrower must pay a penalty if they miss a payment. The agreement should specify any interest rate and whether it is subject to change. The contract should also include arrangements in case the lender or borrower passes away.
Verbal Loan Contracts
Verbal loan contracts are binding in Australia, but they are more difficult and time-consuming to legally enforce than a written contract. The Small Claims Division of the Local Court hears smaller matters or the lender can apply to an Administrative Tribunal in their jurisdiction. The lender will need some form of proof, such as email or phone records or witnesses to the verbal agreement.
The Queensland Supreme Court of Appeal handed down a significant decision about verbal loan agreements in Berhan & Anor v Berghan . The Berghans lent their son money in 2009 because his company was experiencing financial difficulties. In total, the parents advanced almost $300,000. The father agreed to provide these monies on the verbal promise that his son would pay it back. The parties did not discuss a repayment plan. The parents kept no ledgers of the transactions, but their bank statements identified the transfers as “loans”.
In 2015, the father emailed his son expressing concern over the failure to repay the debt. The son’s reply acknowledged his obligation to repay the funds. The parents’ solicitor sent the son a formal demand for the entire debt, but the funds were not repaid. At the first trial, the District Court judge decided in favour of the son. The court found it reasonable that parents would “extend their charity” because of their child’s financial difficulty. The court thought the son’s statements about repaying the loan were consistent with a “moral obligation” to repay his parents and did not rise to the level of proof of a legally binding loan agreement.
On appeal, the Supreme Court of Appeal overturned this finding. The Court of Appeal found it highly unlikely that the parents would gift almost all their funds to only one of their four children. The court also found it significant that the parents used “loan” to describe the bank transfers. The court ordered that as there were no agreed terms for repayment, the entire amount was due upon demand.
This case indicates that it is possible to prove a legally binding loan, even without a formal contract. However, to avoid protracted and expensive litigation, it is important to draw up a formal agreement with the help of a solicitor. Not only will this save the lender time and money in the long run, but it reinforces the idea that the monies are a loan that must be repaid.
Older people in Australia are sometimes “asset rich but income poor”. Older house-rich people may be tempted to take out a reverse mortgage to help their children get onto the property ladder. With a reverse mortgage, the loan is paid back when the homeowner dies or sells the property. However, the older person should be very cautious of this approach. The homeowner may find insufficient equity in their home to meet their future needs.
Going Guarantor for a child
Older people should also be aware of the risk involved in signing security or transferring property title to use as security for a loan. The older person risks losing their own home if their child defaults on the loan. If the house sale does not cover the outstanding debt, the bank can even take other property they own.
Why You Should Refuse
Often the reason someone cannot secure a loan themselves is because the bank is not confident that they can repay the loan. The person may have unrealistic expectations of their ability to service a loan. If the bank does not consider the person a good credit risk, the friend or family member must think twice before risking their own financial security.
It can actually be a better option for a borrower to obtain a bank loan. In Australia, bank lending is federally regulated under the National Consumer Protection Act 2009. As a result, a bank will not lend more than the borrower can feasibly repay. Repaying personal bank loans builds a person’s credit rating and demonstrates financial responsibility. A person can become quite complacent about missing repayments on a private loan in a way that they will not with a bank loan.
You should obtain independent legal advice before lending money to family or friends. You cannot rely on the lendee or bank representative to advise you in your own best interests. A solicitor can draw up a formal loan agreement and review mortgage documentation. They can also assist you with debt recovery, including drafting letters of demand. Please contact the team at Armstrong Legal on 1300 038 223 for confidential and experienced legal advice.