Loaning money to a family member or a friend can be a tricky situation: a personal relationship exists between the parties, the borrower may have a sudden financial hardship, and the lender may have a strong desire to help that person. Generally, it is better to provide a gift of a smaller amount—not expecting to get repaid—rather than lending a larger amount and potentially having problems collecting the money down the road (not to mention the effect this can have on a close relationship).
However, the reality is you may wish to loan money to a family member or friend. If you are going to do so, here are some practical steps to consider when lending money to a family member or friend:
Can the Person Repay You?
- Before loaning money to a family member or friend, ask yourself if that person can repay you. If you are ever forced to take legal action down the road, you will thank yourself for considering the following:
- Job – Is the person employed? You may need to garnish wages to get your money back but that cannot be done if the borrower is not employed.
- Assets – Do they own any property? You may be successful in your claim, but if that person has no assets, you may not be able to collect any money from them.
- Debts – Chances are if your family member or friend is coming to you for a loan, that person has already exhausted other avenues for getting money. Find out if there are any other creditors. While you may be successful in proving your case and the person may have assets, that will not matter, if you are the last person in a long line of creditors that are owed money. There may be nothing left over by the time other creditors have been paid off.
Discuss the Terms of the Loan
While you may feel uncomfortable talking about money with a close family member or friend, it is better to do this at the outset, so both sides understand what to expect. Some issues to discuss include:
- Loan – Make it clear that you are loaning, as opposed to making a gift of, the money and expect to have the full amount paid back. This sounds obvious but set out the exact amount of money being loaned.
- Interest – Perhaps, because it is a family member or friend, you do not intend on charging interest but you may want to. Make it clear either way. If you plan on charging interest, tell the person the rate that will be charged.
- Repayment – As this is a loan, you expect to be repaid at some point. You will need to set out the terms of repayment.
- Default – What happens if the loan does not get repaid? This is the issue no one wants to talk about at the outset, which makes it even more important to discuss. You do not want to be having this conversation when the money is not being paid back.
Put the Terms of the Loan in Writing
Have all those terms discussed above put in a written agreement and have both parties sign it. This cannot be stressed enough. While an oral agreement can be legally binding, it is much easier to have everything in writing, particularly if there is a dispute down the road.
Consider the Implications of Default
You want to hope for the best, particularly when you are loaning money to a family member or a friend, but it is always best to prepared for the worst. The worst (setting aside the breakdown of a personal relationship) meaning you are not getting the money you loaned back. Before you loan money to a family member or friend, some things you may want to consider:
- Amount – If the amount to be paid back is greater than $25,000, you will not be able to bring a claim in Nova Scotia’s Small Claims Court, which compared to the Nova Scotia Supreme Court, is usually quicker and easier to do (ultimately, less expensive).
- Borrower’s residence – If the borrower is out of province, there can be greater expenses in not only bringing a claim but enforcing it, if you are successful.
The above are some things a person should consider before lending money to a family member or friend. Of course each situation is unique. If you are looking to loan a significant amount to a family member or friend, consider having a lawyer draft a loan agreement. If you are in the situation of trying to collect money from a family member or friend, speak to a lawyer who can determine a cost-effective solution for you to do so.
Connect with a member of our team today. To contact a member of our Mortgage Enforcement & Collections team call us at 902-469-9500 or 1-866-339-3400.