Loaning money to a family member may be beneficial for the parties involved but if things go wrong it can cause a lot of heart-ache, financially and emotionally.
Loaning money to a family member may benefit the borrowing party because special arrangements can be made that a commercial bank might not usually provide. The lender can also benefit by helping out a relative and receiving interest on money that they are not using.
Family loans are often made without any documentation. This can lead to problems if any dispute arises in relation to the loan, especially regarding the specific terms that a loan was made on. A loan agreement should include details of any interest or other fees to be paid on the loan amount, when repayments are to be made and how those payments should be made. It is also often a good idea to secure the loan against assets to ensure that the loan can be repaid in the event of a default. This could include registering a mortgage over property or ensuring that the loan is guaranteed by another party.
Documenting the loan and securing the loan will also be beneficial if there is a marriage/relationship breakdown or if other creditors tried to take steps to enforce against the security asset.
Such measures will help to ensure that a loan is repaid and will provide both parties with some confidence of their rights and obligations. As loans can have tax implications it important that loans be put in writing and is especially the case when large amounts of money are involved.
If you are considering being involved with a family loan or are having issues with one, please do not hesitate to contact our office on (08) 6141 1513.