Should I Lend Money To A Friend?

An important initial point is that legally it is presumed that money given to family or friends is a gift, and does not have to be repaid. This legal presumption can be overcome with evidence that the payment was a loan, not a gift. The evidence could be, for instance, a written loan agreement, or a letter or email from the person receiving the money where they agree that they will repay it. While a loan agreement does not have to be in writing, it is much easier to prove that there was an agreement if it is in a written document – and signed and dated.

Another factor to consider is whether to charge interest on the loan. Some people might feel uncomfortable asking a friend or relative to pay interest. Others might think that they would be losing money if they did not do so, especially if the loan is not repaid for months or years – after all, the money would otherwise be earning interest in the bank. But don’t forget that interest on a loan is taxable.

When and how is the loan to be repaid? It is best to agree this right at the start, before any money changes hands. I have seen situations where a loan was made on the basis that it could be repaid “when you can afford it”. Loans made on that basis are never repaid – the borrower never believes they can afford it. Far better for the lender of a large sum is to specify a fixed date for repayment of the loan, or even for monthly repayments to begin immediately the loan is made, just like a mortgage. Also consider what will happen if the loan is not repaid as agreed. Is there a penalty charge? And what happens if one of the parties to the loan dies?

In summary, a loan agreement should:

• Be in writing, signed and dated.
• Specify any interest payable.
• Say when it the loan is to be repaid, and what happens if it is not repaid.

Notes

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