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Personal Loan Agreement Between Friends: What's Involved?

17th May 2022

Loaning money to family or friends to help out in times of need, or to assist in a new investment or business idea is a common practice.

As is human nature, we try to help out those close to us when possible. These acts of gratitude are often created as an informal loan agreement, without legal framework involved to support.

Whilst loaning money to a friend or family member may win their gratitude in the short-term, it can cause rifts long-term. What happens if their payments stop coming through on time, or they start to miss a few, and how can you preserve the friendship if this happens?

The golden rule to a personal loan agreement between friends, is to always have a signed and dated written loan agreement.

With over 125 proud years of leadership in business law, wilson/ryan/grose are regional Queensland’s legal experts. If you’re wondering how to safeguard your interests in a personal loan agreement between friends, wilson/ryan/grose are here to explain the necessity of a written agreement, and the intricacies surrounding the issue of how to lend money to a friend legally and safely.

A Gift or Loan?

Giving a friend or family member money can either be a gift or a loan. Where a loan has to be repaid in full, a gift does not. 

If you’re entering into a personal loan agreement between friends, the terms of the agreement should always be written down. In some cases, when the time comes to pay money back, the receiver may conveniently forget the conversations about repaying money that has been loaned.

Putting your loan agreement in writing can refresh your borrowers’ memory and give you a piece of evidence to turn to when discussing the nature of repayments. 

Should I Be Lending Money to Friends or Family?

Whether or not you should be lending money to friends or family depends on your financial situation and goals.

Can you afford to tie up this money? Are you prepared to forgive your borrowers debt to keep friendly relations? Would you take legal action in case of a default? Why have other lenders turned this borrower down?

These are all things to consider when deciding whether to enter into a loan agreement between family. A loan between loved ones has the same legal weight as a bank loan when formally entered into.

Recuperating Your Money  

A written agreement signed by the involved parties will assist the Courts in deciding whether or not the money was a gift or loan, effectively safeguarding your interests in the event of a dispute. 

An agreement made orally is technically just as binding as an agreement in writing, however, it is remarkably difficult to prove the existence of an oral agreement, meaning it is likely to be your word against theirs. 

As such, wilson/ryan/grose generally recommends a signed written agreement to record the lending of money to a friend, rather than relying on a verbal agreement. If your borrower genuinely intends to repay your loan, they should have no objecting to the formal documentation of the loan.

What Should I Include in a Personal Loan Agreement Between Friends Australia?

Whilst a written loan agreement may seem like overkill or an unnecessary use of time, it doesn’t have to be complicated at all. A solid loan agreement only has to clearly set out the obligations of the involved parties, particularly the borrowers’ obligations.

wilson/ryan/grose generally recommends that a loan agreement between family should include the following terms: 

  1. The amount of the loan;
  2. Any interest to be charged, including the rate and how it is paid;
  3. The term of the loan and when it needs to be repaid;
  4. How the loan is to be repaid (lump sum vs. instalments.);
  5. The method of repayment (cash, direct credit, bank cheque); and
  6. Security for the lender.

Should you have trouble collecting repayments or creating a ‘borrowing money from a friend contract’, you’ll need an experienced, diligent, and empathetic lawyer. 

wilson/ryan/grose has extensive experience in loan agreements. Our professional business law team and litigation team can also assist in recovering any monies that are outstanding from loan defaults.

The above advice is of a general nature only and should not be relied upon without further formal legal advice. If you need case-specific advice, we’re available to offer high-quality, affordable legal services. Our client relationships are enduring, built on a foundation of trust and mutual respect so that we can deliver the most effective and innovative legal solutions regional Queensland has to offer.

Contact our team on 1800 974 529 for legal assistance in the area of personal loan agreements today.

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