A loan of money to a friend or family is called a private loan. These happen often and are not uncommon.
If you are lending money to a friend or family member then we strongly recommend that the person loaning the money (‘the Lender’) and the person receiving the loan (‘the Borrower’) enter a formal, written, loan agreement. Upon execution, a loan agreement forms a legally binding document which records the terms and conditions of the loan.
Loan agreements will generally include terms, such as the:
- the amount of the loan;
- the timeframe and method of repayment of the loan by the Borrower to the Lender;
- whether any interest will be payable by the Borrower to the Lender and, if payable, the terms in which the interest shall be paid;
- what happens if the Borrower defaults on the terms of the loan agreement, including not meeting the payment terms; and
- whether the Lender will be obtaining any security from the Borrower to secure the amounts owed to it.
A well drafted loan agreement will provide protection to the Lender in circumstances where the Borrower defaults on the agreement including not making the repayments in the amount or at the time agreed.
A written loan agreement will assist to avoid misunderstandings between the parties as it provides evidence that money was advanced by the Lender to the Borrower and sets out the basis on which the money was loaned. Accordingly, if a dispute arises between the parties during the term of the loan, the loan agreement will serve as evidence to assist in resolving the dispute.
For any loan, we also recommend that the loan be secured against an asset(s) such as a house, a car or equipment which belongs to the Borrower, and/or a guarantor which has been named in the loan agreement. This is known as a security. The amount of the loan will determine the value of the security that will be required.
The security interest must be provided in writing and agreed to by the Borrower. Normally, the security interest will be registered against the asset which prevents the Borrower from selling the asset without first dealing with the amounts owed to the Lender. For example, if the loan was for the purchase of a house, and the Borrower agrees to provide the house as security to the Lender, then the parties could enter a mortgage that is registered on the Certificate of Title of the house. The house cannot be sold without the mortgage being discharged (which means the Lender being paid in full).
In some circumstances, where the Borrower defaults on the loan agreement and / or fails to repay the loan to the Lender, the Lender can, depending on the wording of the security clause in the loan agreement, enforce its security interest by selling the security to recover the outstanding loan amount.
Other types of security, such as cars, goods or company assets, will usually be registered on the Personal Property Securities Register (PPSR). The PPSR is a public register that lets people know if personal property has security interests over them. Thus, making them less desirable to any potential purchasers of the asset before security interests are satisfied.
If you are a Lender and you have entered into a verbal and/or informal loan agreement with a friend or family, and/or you are about to do the same, it is critical that you act quickly to protect your interests and get a written agreement in place.
Feel free to contact one of our specialist lawyers on (08) 8333 2130 for a no obligation discussion.
This blog was written by Natasha Hemmerling, Partner at Clarke Hemmerling Lawyers.
This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you. Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.