Many people will advise you that you should not lend money to a family member, but sometimes you have the opportunity to really help one of the people you care about most, and so you need to think very carefully about what you should do.
Here are some things to consider before making a decision:
- Your financial situation: Make sure that lending money will not put you in a difficult financial situation or make it difficult for you to meet your own obligations.
- The reason for the loan: It's important to understand why the family member needs the loan and if it is for a legitimate reason.
- Your relationship with the family member: Lending money to a family member can be stressful and can put a strain on your relationship. Make sure that you are comfortable with the potential consequences if the loan is not repaid or if the relationship is affected.
- Other options: Consider whether there are other options available to the family member, such as borrowing from a bank. Remember that banks are very good at working out whether a person has the ability to repay a loan. If the bank has refused to lend the money to your family member, then you should treat that as an expert opinion about your family member’s ability to repay the loan.
So, you’ve thought about all that, and decided to lend the money. What next? You must get a written agreement, and we strongly recommend that you get a lawyer to do it. There are a number of reasons for this.
First, getting a loan documented by a lawyer gives some formality to the event. The borrower knows that you are treating it seriously and paying for a loan document. There is no misunderstanding about whether this is a gift.
Secondly, a written agreement is not all about your legal rights, or suing your family member in court. It is a reference or set of rules. When do I have to repay the loan? It’s in the agreement. How much do I repay? Look in the agreement. What if I’m late? Look in the agreement. All of the misunderstandings and potential disputes can be resolved by looking at the agreement.
Thirdly, if the loan is not documented properly, by an experienced lawyer who can write a short document in plain English that deals with all the necessary issues, problems can (and often do) arise.
For example, many loan documents we see drafted by non-lawyers are not clear enough about when the loan is to be repaid. We see terms like “John must repay the loan as soon as he has sufficient money to do so”, or “John must repay the loan when he sells his house”.
However, what if John doesn’t sell his house, or takes too long to do it, what then? What does “sufficient money” mean?
A simple loan agreement, professionally drafted, is an inexpensive investment, and will go a long way toward protecting your money and your family relationship.