Ask a solicitor: A family member wants to borrow money - what should I do?
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Dear Reader,
Lending money to family members can be a tricky business. It is difficult to say no, even if you want to. If you do wish to loan money, you need to protect yourself from a legal point of view as much as possible. If the person that you are lending money to is reluctant to sign paperwork, you should not loan any money to them. It is critical that a loan agreement is put in place and signed by both of you.
Your family member and you will need independent legal advice with regard to same. A loan agreement is a document in writing between a lender and a borrower where the lender agrees to lend a certain amount of money to the borrower and terms and conditions of the loan can be set down in writing.
It can also detail the security over which the loan will be secured. An agreement can detail the amount borrowed and how it will be used, the repayment terms including payment amounts, frequency and when the loan will be repaid, the interest rate, details if the loan is to be repaid early, shall it be with penalty or without penalty, what happens if the borrower stops paying etc. The loan can be secured or unsecured. Having it secured means that the borrowers would have to provide collateral.
If your family member has real property, then the loan can be secured against that property and a first legal charge registered against that property in the Land Registry in the event of default. When the loan is repaid, the charge can be removed from the title in full.
There is an obligation now where if there is a loan created between certain family members and has been advanced and the loan exceeds €335,000, that it must be reported to Revenue. If there is a ‘free element’ to such a loan, for example, it is not subject to interest, it is at a reduced interest or, in the instances where no interest has in fact been paid, there may be a tax liability.
A poorly structured loan agreement between family members and can cause lasting effects on your personal relationships should they fail to repay the loan. If they fail to repay the loan, you will have to enforce the security and/or issue legal proceedings against your family member. This is undesirable to say the least.
My personal advice to you would be to encourage them to get a loan from a credit union or a bank and if you do, despite my advice, wish to loan the money to them, then you need a very detailed loan agreement in place, preferably security, and you need to ensure that your family member contains independent legal advice also.
You need to carefully weigh up the pros and cons. Mixing money and family can be a dangerous business. Successfully loaning money to a family member requires clear communication.
There is a high probability of conflict if the loan is not repaid or the terms of the agreement are broken. It can cause a huge strain on the relationship, even the wider family relationship, which can have lasting effects. You also need to give consideration of never getting repaid and whether it will impact on your own financial goals.
Email: info@walshandpartners.ie
- While every effort is taken to ensure the accuracy of the information contained in this article, Karen Walsh does not accept responsibility for errors or omissions howsoever arising. Readers should seek legal advice in relation to their particular circumstances at the earliest opportunity.
