Loan or gift?
You get the phone call or text message “I’m in trouble. Can you lend me $5,000? I promise, I will pay you back.” If it’s a family member or a close friend, it can sometimes be difficult to say no. You want to help but you have heard enough stories about people getting into these situations and having difficulty getting the money back.
It’s an informal loan. I trust this person. It’s urgent and we don’t have time to get proper documentation.
You probably also feel a bit awkward about asking your friend of family member to formalise the loan arrangement.
Then things go pear shape. You had agreed that the money would be paid back in a month. Two months go by. You ask about the money and your friend says he’s strapped this month but when he gets paid, he will be transferring the funds to you. Three, four, five months go by and there are more excuses. Things are now getting REALLY awkward. You are now wondering whether you have to initiate legal action to get your money back.
The problem is – all this happened verbally and there is no record that this was even a loan. If this went to court, it could be argued that this was a gift.
Practical tips when lending money
As a lawyer, I would advise you to always have loans documented formally even if it is with family and friends. However, I understand the social difficulty that this causes.
Tip #1
The first tip would be to avoid such situations altogether. It is ok to say ‘no’.
Tip #2
If you can’t say ‘no’ then do not lend more than you can afford to lose.
Tip #3
If you are not going to formalise the arrangement with a loan agreement, then the next best thing would be to create a paper trail, whether this is via text message or email. The minimum that you should have in your paper trail are:
- That the money is a loan and not a gift;
- The timeframe that you have agreed for the money to be repaid; and
- Acknowledgement from the other person.
If your friend does not respond or makes the situation uncomfortable for you, then you need to ask yourself whether you should be lending money to this person.
If you decide that you want a loan agreement drafted, we would be happy to assist. Please contact us to discuss your situation.
