6 golden rules when lending money to family + loan agreements

Loans between family members happen all the time. It feels good to help out a family member who might be struggling or just needs a little boost, whether it’s a parent-to-child loan agreement, sibling-to-sibling, or something else. And if you’re the one in need of money, knowing your family is there to support you can be a great relief.

But we’ve also all heard the negative stories about family loans – the ones where things have gone wrong, loans remain unpaid, relationships become strained or when these loans become part of estate disputes.

While it’s good to know how things might go wrong, as long as you take the right steps, there’s no reason you can’t both help out your family and limit your own risks.

Here’s what to consider when lending money to family.

Can (and should!) you loan money to family?

Of course, you always can lend money to family – or whomever you want. It’s your choice. But when it comes to making the best decision about whether or not to lend money to family members in Australia, it’s important to first understand how this could impact you both financially and in terms of your family dynamics. 

Ask yourself if this will put you in a bad financial position? A bank wouldn’t loan money if it will put them in financial strife… and neither should you. If you think it will make it difficult for you to pay your bills, or keep up your own lifestyle, it’s best to say no. 

Additionally, you need to consider the person to whom you’re considering making the loan. While they may be family, this doesn’t mean that they’re a good financial bet. Before you make any loan to any family member, you need to consider whether they are responsible in paying their bills generally (and are perhaps just going through a one-off crisis!) or whether they have a history of financial irresponsibility. 

Need some expert advice? Request a call back from our caring team here.

Considering the pros & cons of lending money to family?

The golden rules for lending money to family

If you decide you would like to consider lending money to your family member, it’s good to consider these golden rules. 

1. Only lend money you’re prepared to lose

If you’re worried about lending money, or you don’t feel you’re in a financial position to do so, then simply say no. You’ll want to be able to explain your reasons but you shouldn’t lend any money if you don’t feel totally confident.

2. Be clear that it’s a loan, not a gift

When you give someone money it can either be considered a loan – which needs to be repaid – or a gift – which doesn’t. However, if you don’t make it absolutely clear that the money you are providing is a loan, it can easily be considered (both legally and by your family member) to be a gift. And this may cause some problems when it comes time for repayment. Independant legal advice for both sides and proper documentation are critical.

3. Consider the tax implications

Lending money to family anyone can incur tax and centrelink implications and on both you and the borrower 

You’ll need to speak to your tax advisor to understand these implications before you enter into any loan – with family or anyone else. 

4. Know what the money is for

It’s important that you understand what the money that you’re lending will be used for. If you’re lending money to family to buy a house, for example, it’s important that this is documented in a way that uses the property as security. 

If not, you may be at risk for coming last in line of creditors if financial disaster strikes. 

5. Consider how much you are lending

Large loans of significant sums may be treated differently than small loans. This is certainly true for tax purposes. It’s a good idea to speak to your financial advisor to understand these implications. 

6. No matter the loan type, always have an executed loan agreement

The most important golden rule for lending money to family is to have a signed and dated loan agreement in place – this includes a loan from the Bank of Mum and Dad. Why is this important? 

Well it ensures that your ‘loan’ is actually a loan (and won’t be construed as a gift). It also gives you a timeframe for repayment, lays out the borrower’s responsibilities and sets out interest rates. Compliance with the documentation is critical as is updating it if circumstances change.

Most importantly, you have recourse to go to court to have the loan agreement enforced if your family member fails to repay the loan on time, or if another party tries to take priority in payment.

How to say no to lending money to family

Saying no to family when they ask for a loan is not always easy. But it’s important to be able to do just that when you don’t feel comfortable or when you’re worried about the financial implications.

Here are our tops tips for how to say no to lending money to family.

1. Be clear.

When you say no, be very clear. Sometimes people can find themselves caging their words in order to soften the blow. But this can lead to confusion and lingering questions. Simply say no, very clearly, and then you can take the following steps as needed.

2. Explain your reasons.

Because this is your family member, it’s a nice idea to explain your reasons why. You can say that you have a policy of never lending money to family or friends. Or explain that you simply don’t have the means to make a loan at the moment. 

3. Don’t give in to guilt.

It’s easy to feel guilty when you say no to someone you love. And you may feel compelled to agree to the loan because of it. Don’t give into the guilt, or you could find yourself in a difficult situation. If you do find that you have strong feelings of guilt, reach out to someone you can talk to – perhaps a counsellor or trusted financial advisor. 

4. Offer to help in another way.

Even if you say no to a financial loan, you can offer to help in other ways. Some of these might include:

  • Brainstorming other solutions.
  • Helping them to sort out their own finances, starting with a budget.
  • Working together on a loan application.
  • Finding ways to earn extra money or save money on current bills.
  • Helping out with other bills for the short term.
  • Helping them to find financial education courses or advisors.


Legal implications for lending money to a family member

  • Formalise your arrangement.

    If you don’t take the time and effort to formalise your arrangement you might find that no party is protected when something goes wrong. This could include a relationship breaking down, the borrower’s business failing or suffering from financial distress, or one party simply refusing to pay.

  • Get independent legal advice.

    It’s mandatory to get independent legal advice before entering into any financial agreement. Without independent legal advice the courts could set aside the loan or financial agreement as unenforceable. 

  • Create a security on the home.

    If you are giving a loan for a home purchase, you must ensure that the home is acting as security for the loan. This is the only way to be confident that you will be the first to be repaid in the case of a bankruptcy or other financial disaster.


Loan agreement between family members

The most important legal document for lending money to family members is a loan agreement. While a verbal agreement can be legally binding, it’s difficult to prove or enforce and will leave you at risk. On the other hand, a signed and dated loan agreement will ensure that your loan is documented accurately.

The most important legal document for lending money to family is a loan agreement.

Asset Protect is one way to ensure that you have all the legal documentation you need to safeguard your assets and set you up for success with any family loan. It’s a simple process that starts with an initial consultation and gives you the independent legal advice you need as well as the formal documentation required for your unique loan situation.

Confidently loan money to loved ones!

Wanting to lend money to help out a loved one is a lovely gesture. And when done right, there’s no reason it can’t be beneficial to both parties in the end. Get in touch with our experts who are happy to provide you with advice on a loan agreement between family members and support to make sure you get the outcomes you’re looking for.


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