Page 2 - Wealth-Adviser-Issue-137 (FWP)

ISSUE 137
MAY 2026

A loan agreement is a contract between the lender and the borrower
setting out the terms on which money is advanced and the basis
on which it is to be repaid. For a family loan, the substantive

provisions are the same as for any other commercial loan

Most family lending never sees a courtroom. But the interest looks, on its face, like an arrangement the parties
Berghan case is a useful frame for the article that follows, intended to be repaid. A zero-interest loan can still be a
because it surfaces the question that comes up whenever genuine loan — and is common in family contexts — but
family money moves from one generation to the next: is this it removes one of the most useful indicators that the ar-
a loan or a gift? The answer matters less when everything rangement is commercial in character. Where interest is not
goes well than it does when something doesn’t — when the charged, the rest of the document needs to do more work
adult child later separates, becomes bankrupt, dies, or sim- in establishing that the parties intended a legal obligation
ply stops paying. At those moments, what convinces a court, rather than a moral one.
a trustee, or Centrelink that money advanced informally was Repayment terms are the second. A loan can be repayable
a genuine loan rather than a disguised gift is the documenta- in fixed instalments, in a lump sum on a specific date, or on
tion — or the absence of it. demand. Each is defensible; the important point is that the
document says which. Open-ended arrangements where
What a proper loan agreement actually does the timing of repayment is unspecified and effectively at the
A loan agreement is a contract between the lender and borrower’s discretion are the ones most vulnerable to being
the borrower setting out the terms on which money is characterised as gifts. “On demand” loans in particular
advanced and the basis on which it is to be repaid. For a are useful for family contexts because they give the lender
family loan, the substantive provisions are the same as for flexibility, but the lender needs to be aware that the limita-
any other commercial loan: identification of the parties, tion period for recovery can begin running from the date of
the amount advanced, the date of advance, whether and advance rather than the date of demand — a point that has
at what rate interest is charged, the repayment schedule caught more than one parent out.
(or a statement that the loan is repayable on demand), any Security is the third. Most family loans are unsecured.
security taken, the consequences of default, and the govern- Where the loan is substantial — for instance, where parents
ing law. The document does not need to be elaborate, but it are advancing a deposit toward a child’s home purchase — it
does need to be written, signed, and contemporaneous with is sometimes possible to register a second mortgage over
the advance. the property to secure the advance. The first mortgagee (the
A promissory note is a narrower instrument — an uncon- bank) will need to consent, which is not always forthcoming.
ditional written promise by the borrower to pay a specified But where it can be arranged, it materially strengthens the
sum to the lender on demand or at a specified time. It is parents’ position: the loan becomes a secured debt rather
shorter and simpler than a full loan agreement, and for than an unsecured one, which matters for both family law
smaller or shorter-term loans it can be a workable alterna- and bankruptcy purposes.
tive. The substantive difference is that a loan agreement is The fourth is the simple discipline of contemporaneous
a two-party contract setting out the full bargain between documentation. The single biggest reason informal family
lender and borrower, while a promissory note is essentially loans fail when tested is that the documentation either
an acknowledgement of debt by the borrower. For most doesn’t exist or was created retrospectively. A loan agree-
situations where documentation actually matters — larger ment drafted at the time of the advance, signed by both
advances, longer terms, security, family-law exposure — the parties, kept by both parties, and reflected in bank records
loan agreement is the more substantive vehicle, and the rest that describe the transfer as a loan is the basic baseline.
of this article focuses on it. A promissory note has its place Reconstructing it years later — particularly under the pres-
as a lighter-touch instrument where the parties want a clear sure of litigation — rarely persuades a court.
written record of a smaller debt without the machinery of a
full agreement. The third-party challenge — when an outsider
The features of a properly drafted family loan agreement tests whether it was really a loan
tend to mirror those of a properly drafted commercial loan. The case for documenting family loans properly does
Interest is the first. A loan agreement that provides for not rest on the parent-child relationship breaking down. It

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