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It is quite common for friends and family members to lend or gift each other money from time to time. In some instances, the amount lent or gifted can be quite substantial. However, when relationships break down for one reason or another, whether that money was intended to be a gift or a loan can come into question. Therefore, this article looks at the important differences between a gift and a loan.

What is a Gift?

A gift is money or personal property voluntarily given from one party to another party, in circumstances where the:

  • giver does not intend for the recipient to return or repay the property or money given. That is, the property or money is given unconditionally with no obligation on the recipient to make a repayment; and
  • transaction is charitable in nature, and the giver gains no benefit from giving the gift.   

What is a Loan?

A loan is money, property, or other material goods given by one party to another party in exchange for future repayment of the loan value amount on certain terms, such as interest payable. The parties must intend to be legally bound by the transaction. Further, there must be a clear intention of repayment.  

Presumptions in Law 

When a court is required to determine if money was gifted or loaned, they will look at the relationship of the parties as a starting point. There are two broad categories of relationships that the courts have recognised:

1. Domestic and Social Relationships

A party in a domestic or social relationship who claims money was loaned, must produce evidence to prove to the court that money given was a loan and not a gift, for example, a signed loan agreement. For example, a parent providing money to a child as a family loan is a domestic relationship in this context.

2. Business Relationships

A party in a business relationship who claims money was gifted, must produce evidence to prove to the court that money given was a cash gift and not a loan.  

These lines can be easily blurred in situations where friends or family members are carrying on a business together.

When Lending, Get it in Writing! 

If you are providing money to someone and intend for them to repay it, having the agreement recorded in writing will:

  • eliminate the possibility of the borrower considering the transaction as a gift;
  • reduce any misunderstanding between the parties about the terms of the transaction; and 
  • help limit possible future disputes about repayment obligations.  

You must record the terms of your written loan agreement clearly and they should include the following key terms where relevant: 

Term
Explanation
Party details

You should record the borrower and lender’s full name, address and any other contact information in the agreement. If there are multiple borrowers or lenders, you should include all of these.

Loan amount

It is important to note the difference between the Principal, being the amount advanced to the borrower, and the Loan Amount, being the amount to be repaid. Commercial loans will generally include administrative fees and charges in a Loan Amount.

Interest

If you intend to charge interest on the loan, you will need to include the rate of interest to be applied and how it will be calculated, for example, 5% interest per annum compounding monthly.

Loan repayments

You should include details of when and how the borrower is to repay the loan. For example, you may require a single lump sum repayment by a specific date, periodic instalment payments over a specified period of time, or even a combination of both. If repayments are to be made by EFT, you should include the relevant bank account details in the loan agreement.

Loan term

The term of the loan refers to the period of time that the money is being loaned over. The loan term could be a specific date, i.e. 31 December 2025, or a period of time, i.e. 36 months. The loan term confirms the date or time in which the borrower must repay the loan amount in full.  

Security

If you are lending a large amount of money, you may wish to consider requiring some form of security to help protect your interest should things not go to plan. Loans can be secured against an asset in the form of a mortgage (land) or charge. An unsecured loan will necessarily increase the risk to a lender if the borrower cannot make repayments.

Default

It is important to set out what will happen if the borrower fails to make payment as required or otherwise breaches the terms of the loan agreement. For example, if you intend for the full balance of the loan amount to become due and owing upon a default, you must make this clear.  

The above key terms are not intended to be exhaustive. It is important that you carefully consider your specific needs and circumstances and adapt the terms of your loan agreement accordingly.

Proving Your Claim

You do not need to record a loan agreement in writing for it to be enforceable. However, you will need to be able to establish the parties’ intentions as well as the terms of the loan agreement through evidence should the borrower fail to make payment. When a loan agreement has not been recorded in writing, this is often problematic. Emails and text messages between the parties can be helpful. However, a fully signed loan agreement is always the safest option.  

Good record keeping will assist you greatly in proving your claim. If possible, when transferring the principal loan amount or subsequent repayments, avoid cash payments that are incredibly difficult to trace. Payments via electronic funds transfer or even cheque are far better options as you will be able to rely on bank statements to evidence the payments made. Moreover, this will reduce the risk of a dispute about the amount that remains due and owing.  

Key Takeaways

There are important differences between a gift and a loan. If you are considering lending money, it is important to have that transaction clearly recorded in a written agreement. Having it in writing will reduce the risk of misunderstanding and possible future disputes. Therefore, a lawyer can assist you by advising on and drafting appropriate terms to be included in your private loan agreement. Alternatively, if your borrower has failed to make payment in accordance with your loan agreement, and you need assistance recovering the balance owing to you, contact LegalVision’s litigation lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a gift?

A gift is money or personal property voluntarily given from one party to another party, in circumstances where the giver does not intend for the recipient to return or repay the property or money given. Also, the giver gains no benefit from giving the gift.

What is a loan?

A loan is money, property, or other material goods given by one party to another party in exchange for future repayment of the loan value amount on certain terms. The parties must intend to be legally bound by the transaction and there must be a clear intention of repayment. 

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