The trap and pitfalls of Lending money.

Published 16 Mar 2016
Liza Nguyen

The trap and pitfalls of Lending money.

Loans expressed to be repayable on demand are often misconceived and time bombs in the making.

Case study

Jenny has some savings. She will help her son Carlos buy a home by lending him the 10% deposit. Both agree that the deposit will be repaid by Carlos when needed by Jenny.

Jenny and Carlos sign an agreement which expressly states the money is a loan, not a gift, and is repayable by Carlos on demand by Jenny.

Jenny provides the money. Carlos buys his house and gets married.

Time goes by.

Jenny has had no need to call on the loan.

Carlos’ marriage then breaks down 7 years later.

Jenny calls on the loan for the deposit to be repaid.

Jenny will be surprised to discover that the loan is no longer recoverable.

The problem?

Jenny became statute barred.

The limitation period runs from the time the money is advanced, not when the demand is made.

In NSW, loans repayable on demand are statute barred after 6 years from the time the money is advanced.

It is not good enough to express the timing of repayment “on request”, “at call” or “on demand”, if it is intended that the loan could be repaid after 6 years.

Expressions such as these are intended to keep things simple and flexible but have no practical effect after 6 years.

Don’t fall into Jenny’s trap.

You must seek legal advice before lending, whether to an unrelated party, friends or family members. See our team of lawyers at Maclarens Lawyers who can assist you avoid the pitfalls. It is most often loans between family members that a handshake agreement or an “on my honour” promise is made and, quite frankly, is not good enough.