Loan Agreements

To lend or not to lend, this is often an emotional dilemma parents and family members face when approached for a loan by a family member.

Many horror stories can be recounted with broken and lost relationships as the loan was not properly documented or not at all.

Important Consideration

Important questions for a lender to consider would be:-

  1. What is the purpose of the loan, is it a sound or frivolous purpose?
    2. Are you gifting money or is it a loan?
    3. Can you afford to make the loan?
    4. Are you prepared to lose the money loaned?
    5. Are you prepared to clearly document the loan terms?
    6. Are you seeking security for the loan? What if no security is available?
    7. Are you charging interest?
    8. When is the loan repayable and how are repayments to be made?
    9. Has the Borrower the ability to repay the loan?

To preserve the relationship of a loved one, it Is prudent for both the Borrower and Lender, depending on the amount being loaned, to be separately and independently represented by solicitors to draft and advise on the terms of the Loan Agreement. The Agreement must clearly document the terms of the loan.

Loan Agreement

The terms of the Loan must be clear and must document:-
(a) The parties to the Agreement and their relationship;
(b) The amount being loaned and acknowledgement of the receipt of the loan by the Borrower;
(c) The terms of the loan;
(d) Consider whether the repayments are of:-
– interest only on a weekly or monthly basis;
– principal and interest on a weekly/monthly basis;
– the full amount at the end of the term?
– the full amount payable on demand?
– can the loan amount be reduced at anytime in agreed multiples.
(e) Is the loan to be secured?
– is the Borrower able to provide any security, for example, a third party guarantee.
– if the Borrower has landed property, it would be advisable to obtain a mortgage over the property (whether it be a second or third mortgage) or even a caveat over the property to secure the Lender’s interest.

If there is no landed property, query if the Borrower has other tangible or intangible property that could be secured. With the enactment of the Personal Securities Act it will soon be possible to register a security interest on a National Register to secure the loan.

(f) The Agreement must document:-
– the interest rate chargeable (if any); and
– if default interest is chargeable for late or non-payment.

(g) The Borrower must seek independent advice and acknowledge receipt of the loan and receipt of independent legal advice. An acknowledgement that the Borrower is solvent would also be prudent as this would reflect an expectation of payment.

Consequences of Non-Payment of Loan

(a) Tax consequences of non-payment will have to be looked into from the perspective of both the Lender and the Borrower;
(b) The relationship between the Lender and the Borrower will be sullied and could give rise to litigation; and
(c) A judgment for the Lender may give rise to compromising the Borrower’s credit rating.