Family loans are not uncommon. They are normally given to help purchase a new business, purchase a home or overcome financial difficulties.
Why should I have a loan agreement?
Having a loan agreement in place will provide you and your family members with certainty. This can prevent family disputes and put you at ease knowing that you can enforce your agreement.
A recent case in the Family Division shows why you may want to document your loan.
Mum and dad gave son and daughter-in-law significant money to purchase their first home. The loan was not documented but verbally the parents and son had always agreed this would be a loan. After a few years son and daughter-in-law decided to separate and divorce.
Normally, a loan is deducted from a couple assets before the marital pool is split.
During the divorce the daughter-in-law argued there was no loan and the amount was given as a gift. The son and his parents argued it was a loan and was stated verbally as a loan when the money was given.
The family court sided with the daughter-in-law as there was no formal evidence of a loan. The end result was that the daughter-in-law was awarded the family home with all the equity funded by the son’s mum and dad. The son now needed to restart his life but he could no longer rely on his parents to fund him.
In a business situation it could be much worse, as the loan or 'gift' given to the business could technically be payable to the spouse who is not involved in the business. Eg Mum and dad give a loan to their daughter to invest in her business. The ex husband claims the loan was a gift and the family court agrees with him. Technically half the 'loan' is payable to him as part of the split of assets. The question arises as to how the daughter will be able to pay the ex husband especially if the money has already been invested in the business.
But do not think that a family loan agreement should only be used in matrimonial situations. A sibling giving a loan to another sibling for starting up a business could cause issues later if one believes it was a loan and the other thinks it was a gift.
So what should a loan agreement contain?
The terms of your family loan agreement are up to you. However, the terms of the loan should be are specific. It should state if interest is payable and any dates for repayment. The loan document should also be signed and dated.
You might want to consider having a security or caveat over any property as well.
This article is for information only and should not be considered legal or business advice. You should take relevant professional advice from your advisor before you take any action.