Often times we are approached by parents or other family members who are in one of two situations relating to family loans.

In the first situation, they want to give a helping hand to a family member such as their children to give them a helping hand or to get into the property market (but they don’t want the stress or hassle of being a guarantor). The clients just want something simple and straight forward to document that it is a loan, not a gift, and usually want it done as quickly as possible as it may have been only thought of at the last minute. This is straight forward and something that can be sorted out quickly and be customised to a clients individual needs by our team.

In the second situation, clients come to us because ‘it’s already hit the fan’. They have lent money to a family member or friend on a verbal agreement, or worse still without setting out any terms from the outset. Then suddenly after a disagreement or argument, the borrower refuses to repay the amount claiming it was a ‘gift’, that there was no agreement for repayment or flat out denying that the loan existed in the first place. The client is therefore distressed, feels betrayed and is out of pocket potentially hundreds of thousands of dollars.

In this case, it is a matter of establishing that an oral agreement exists. An oral agreement is a binding contract, but unless there are third party witnesses to the agreement being made, it can come down to your word against theirs. Evidence that money passed from your bank account to theirs is not sufficient as it does not prove the intention. Was it a loan, or was it a gift?

An undocumented loan can also impact on a number of other areas of law such as:

• property matters where it was intended that the loan be repaid on sale of a property;
• family law proceedings where it may need to be determined whether or not the loan is to be taken into account as a liability during a breakup; or
• an Estate where Executors may not have been told by the Deceased of the existence of the loan and therefore beneficiaries may also lose out. Or alternatively if a loan was intended to be waived on the passing of the lender but this is not recorded, the Executors may be legally forced to call up the loan to the detriment of the Borrower.

It is always important to treat any loan as an ‘at arms length transaction’ and have it properly recorded. This protects you and the borrower.

If you are considering making a loan to a family member or friend, please do not hesitate to contact our office to discuss how best to move forward.