When it comes to lending money to family, there is always emotion involved. Some people say that when you lend a family member money, you should not expect it back. However, there are times when you can’t afford to be charitable and need every cent to be returned.

“The simple thing to do is to draft an acknowledgement of debt between the lender and the borrower,” says Albert Johnson, financial planning and sales manager from Eqfin.

Lending money to your family should be treated as a business transaction and that is the reason you need a contract.

This contract must state the terms of the agreement and the dates of when these payments will be made. 

This binds the borrower to pay back the loan according to those terms.

What if the borrower defaults?

When the family member does not stick to his or her side of the agreement, it can become uncomfortable, especially during family gatherings. This can create some animosity between you and the borrower.  It might even divide the family.

However, it is important for you and the borrower to go back to the agreement that you both signed to remedy the situation.  The agreement should state clearly what happens when the borrower defaults. You, as the lender, can ask to keep a valuable possession of the borrower as collateral for the loan. Sometimes you will need to involve the court to help you collect the debt.  

How do you draw up the agreement?

The loan agreement doesn’t have to be complicated. You can keep it simple, with key information such as:

  • Personal information - Your name and the name of the person you’re lending the money to should be visible in the contract. This includes the contact details of both parties.
  • Loan amount - The amount of money you lend to your family member should be clearly stated and can even be written in words.
  • Interest – The agreement should state clearly the percentage of interest charged and how it is charged, e.g. monthly or weekly.
  • Repayment terms – Make sure that the repayment amount and the frequency are listed on the contract.
  • Repercussions of not paying – The contract should state what will happen if the borrower defaults.
  • Signatures – You and the borrower must sign the contract to ensure the validity of the contract.  A witness may sometimes be needed to also sign.
  • Co-signer – If there is someone willing to take responsibility for the loan should the borrower fail, that person should sign too.

At the end of the day there is a lender and borrower and a transaction that takes place.  If the borrower has the full intention of repaying the loan (with or without interest), then that person will be willing to enter into this agreement, concludes Johnson.

 

This article has been prepared for information purposes only and it does not constitute legal, financial, or medical advice. The publication, journalist, and companies or individuals providing commentary cannot be held liable in any way. Readers are advised to seek legal, financial, or medical advice where appropriate.