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8 Essential Tips For Lending Money To Family

Lending money to family is often driven by a desire to help those we love and care about. However, it can quickly become a source of tension if not handled with care and consideration.


Disputes over money are a common cause of family breakdowns, often stemming from misunderstandings about repayment or entitlement. To avoid unnecessary conflict, it’s important to approach such arrangements with clarity and foresight.


That's why we've put together a list of our essential tips you should consider before loaning any money to friends and family.


Woman Frustrated As Husband Sits In Background

1. Communicate Clearly From The Start


Before lending any money, have a frank discussion about why the loan is needed, how much is being borrowed, and how and when it will be repaid. Clear communication sets expectations from the outset, preventing future misunderstandings or disputes.


2. Don’t Confuse A Loan With A Gift


Make the distinction between a loan and a gift clear from the start. If you don’t explicitly state that you expect repayment, the borrower may assume that it’s a gift. This confusion can lead to resentment and strain relationships over time.


When giving someone money, it's essential to specify whether it's a loan, which must be repaid, or a gift, which doesn't require repayment.


If you fail to explicitly define it as a loan, it could easily be interpreted as a gift which could lead to complications when repayment is expected. To avoid such issues, obtaining independent legal advice for both parties and ensuring proper documentation is crucial.


3. Have A Loan Agreement


One of the most critical steps is to document the loan agreement in writing. This should include the loan amount, repayment terms, interest (if applicable), and consequences for non-payment. It provides clarity and legal protections for both sides, and should be signed and dated to avoid any later disputes.


4. Consider The Impact On Your Relationship


Lending money to family can strain relationships, even when you enter the loan with the best intentions. Be mindful of potential changes in the relationship dynamic, and address any issues as they arise. Keeping communication lines open will help maintain a healthy relationship throughout the loan term and beyond.


5. Seek Legal Advice


For substantial loans or those with complex terms, we recommend you obtain legal advice, and have a lawyer prepare the loan agreement. It's mandatory to get independent legal advice before entering into any financial agreement, and a lawyer will ensure it has been drafted correctly and is in your best interests. Without this independent legal advice, the Courts may set aside the loan agreement as unenforceable.

For more information about Binding Financial Agreements, read our article here.


If you're interested in having our senior lawyers prepare any loan agreement, please don't hesitate to contact us to discover how we can help.


6. Don’t Put Your Financial Stability At Risk


Before agreeing to lend money, assess your financial situation carefully. Ensure that you’re not jeopardising your own financial well-being at the expense of a family member. Only lend what you can afford to lose, as there’s always a risk that the loan may not be repaid.


It’s important to remember that you’re under no obligation to lend money, even to family. If you’re worried about lending any amount of money, or you otherwise do not believe you are in a position to do so, you should simply say no.


7. Set Realistic Repayment Terms


Make sure that the repayment terms are manageable for the borrower. It’s essential to be flexible, but this shouldn’t come at the expense of your financial security. Aim for a balance that supports the borrower while ensuring you’re not left at a disadvantage.


8. Don’t Encourage Poor Financial Habits


While it’s natural to want to help a family member in need, consider whether lending money is the best solution. If the borrower has a history of financial mismanagement, alternative support such as financial counselling or a financial advisor may be more beneficial.


Organisations like the Financial Counsellor’s Association of Queensland (FCAQ) or MoneySmart provide free advice for low-income individuals.


Bonus Tip: How Loans Affect Pension/Centrelink Entitlements


"Will this affect my pension?"


This is a question we are often asked by our older clients who are considering loaning money to their child or grandchildren.


Centrelink pension payments depend on income and assets, so changes to a lender’s financial situation may impact entitlements. It's important to note that Centrelink has restrictions on gifting assets to influence eligibility for pension payments or aged care costs.


At the time of writing, you can gift assets of $10,000 in a financial year, with a limit of $30,000 over a 5 year period before your payments are affected.

From a legal perspective, money transferred from a parent to a child is presumed to be a gift unless proven otherwise by the parent. The burden is on the parent to demonstrate the transfer was a loan.


A loan, if documented, is exempt from the gifting amount, and will not affect pension eligibility. However, if a loan is forgiven, or if a guarantor pays off someone else’s loan, that amount may be included in the assets test.


As we are not financial advisors, and we recommend speaking with a Services Australia representative by calling your regular payment line, visiting a local centre and visit their website to learn more.


Need Legal Advice On Lending Money To Family?


Lending money to family is a kind gesture, but it’s crucial to approach it with a plan. Clear communication, written agreements, and legal formalities are essential to ensure that both parties are protected, and relationships remain intact.


If you’re considering lending money to a family member and need advice on drafting a loan agreement or managing a dispute, our senior lawyers at RHC Solicitors can help. Our team provides legal guidance on financial agreements, property settlements, and estate planning to help you navigate complex family matters.



 

Disclaimer: This publication is not intended to be comprehensive, nor does it constitute legal advice. We are unable to ensure the information is current and there is no guarantee in relation to accuracy. You should seek legal or other professional advice before acting or relying on any of the content of this publication. The views and/or opinions expressed in this publication is that of the author and may not necessarily represent the views and/or opinions of RHC Solicitors.


RHC Solicitors ©

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