Lending money to friends and family

Lending money to friends and family

Be Careful When Loaning Money to Friends or Family

Many people help out friends or family members from time to time by providing them with a loan, whether interest-free or not.

Although these types of loans are not intended to be gifts, the details of the loan are often not formalised (often they are not written down at all) and there may be no detail as to when and how the loan is to be repaid. As a general rule, a loan falling into this category is considered a loan ‘payable on demand’. Despite the best of intentions between the lender and borrower, these types of loans often go awry. There is also a presumption that money advanced to family members may in fact be a gift and absent evidence to the contrary, even establishing the existence of a loan can be difficult.

Loans ‘payable on demand’

If you have made or received a loan payable on demand, then the following two legal rules must be considered:

  1. once the money is handed over the lender may have an immediate right to sue for recovery of it (or any balance owing); and
  2. limitation legislation in WA means that a court proceeding cannot be taken more than six years from the date that the cause of action first arose.

In simple terms, the limitation period may be triggered when the loan is advanced and if it is, then the lender will only have six years from the date of advance to pursue the borrower through the courts for the debt. Whilst most loans are short-term, where the money is loaned on a ‘pay when you can’ type arrangement, this scenario becomes very problematic for a lender if the borrower ultimately fails to repay the loan in whole or part.

In light of the above, if you intend on loaning money it is important to put a written loan agreement in place. The agreement should (amongst other things) specifically state that the loan will become payable at a future date (as opposed to not having a date which would make it payable on demand).

If you have already loaned money without formalising an agreement, you may still be able to extend the limitation period by obtaining an acknowledgment of the loan or requesting that the borrower enter into a loan agreement. This step needs to be taken before the expiration of the six year limitation period. The limitation period is reset from the time that the acknowledgment is received or the loan agreement entered into.

Conclusion

Loaning money informally without a written loan agreement incorporating a fixed date for repayment can lead to unintended consequences and ultimately a lender may find it impossible to recover the loan amount. All financial transactions (even the ‘friendly’ ones) should be in writing to ensure that the parties are aware of their obligations and the lender is properly protected.

 

Finally, if you have read this far and think that you need some practical advice or assistance in relation to your situation, then now is probably the time to get in touch. Austral Legal can help and we offer an initial discounted 30-minute SmartMove appointment for $80 by phone or in person at our office. Bookings can be made online through our website or simply by phoning our office on 08 9745 9550. Once we have a handle on what is required, we may well be able to offer a fixed fee for any further legal services, giving you cost certainty from the start. Austral Legal. Practical advice.