It can be hard to see someone you care about struggling financially. But if you're considering lending money to a family member or a friend, make sure you go into the arrangement with your eyes open. Know your rights and responsibilities. There are steps you can take to prevent problems.
You are taking on risk
“My daughter and her husband were really stressed out about all their debts. She thought a holiday cruise could help ease the pressure. They asked me to lend the money to pay for it. They promised to pay me back when my son-in-law got a new job. A few months later they split up. I’m losing hope that I’ll ever get paid back. Now it’s me who is stressed out.”
– Jillian, Surrey
If someone can’t get the money they need from a bank, it’s likely the bank considered them too risky. This is the risk you’re taking on when they come to you to borrow money.
Why do they need this money? There are many reasons a person might ask for a loan. Some may strike you as more legitimate than others. “I want to make a downpayment on a home” can feel like a stronger claim than “I need to kick back for awhile in Baja”.
Here are some situations that might feel worthy of your support:
- a friend is starting a new business
- a family member is trying to get back on their feet after a divorce or legal problems
- a friend has suffered a medical emergency or illness
Also consider the borrower’s financial habits. Are they disciplined in not taking on too much debt? Do they pay their bills?
Don’t feel pressured into giving or lending money
“If you don’t give us the money we’ll have to move and you won’t see the grandchildren anymore.”
“If you love me you will trust me to pay you back the money.”
Emotional or manipulative appeals shouldn’t change your decision-making. It’s okay to say no. Here are tips for how you might do so gracefully.
- Explain that you don’t want to risk damaging the good relationship you have with them.
- Let them know it’s nothing personal. It has nothing to do with your love or trust of them. You simply have firm house rules around lending money.
- Give examples of what could go wrong, such as losing your home. Point out just how difficult it would be for you if this were to happen.
- Help them explore other options for managing the problem.
Loaning money to relatives isn’t always straightforward. There are important legal questions involved, like whether you should give a gift or a loan. A family law lawyer can help you come up with the best solution for your specific situation.
You can ask for security
“Security” is something the borrower offers the lender to give teeth to the promise of repayment. The actual physical thing being offered is called collateral. It could be real property or personal property. Real property is land. Personal property is anything else: vehicles, boats, trailers, tools, etc.
If the borrower gives you a security interest in their personal property, and they fail to repay the loan, the law gives you the right to (among other things) take the collateral, sell it and keep the proceeds.
For example, the borrower might give you a security interest in their 2009 Mazda. The car is the collateral. If they fail to repay the loan, you have the right to take the Mazda. (If the car is primarily for personal or family use, your right to take the car disappears once they repay 2/3rds of the loan.)
If you are dealing with property located on a reserve, special rules apply. You should seek legal advice.
You can ask for a security agreement
A security agreement is a written document proving the borrower’s intention to grant you a security interest. It’s perfectly acceptable to ask for one.
The agreement should include:
- the amount of the loan
- a description of the collateral
- a description of what constitutes a default
- options if the borrower defaults
If you ask for a security agreement, it is best to have a lawyer or notary assist you in preparing one.
Steps you can take to protect your security
As a lender, you may wish to protect your security interest from third parties. To do so, you must ensure the security agreement meets three conditions:
- it includes specific descriptions of the collateral
- the borrower has signed it
- the agreement is registered with a government registry
These steps “perfect” your security interest. A perfected security interest has priority over claims by other parties to the collateral. If two parties have a security interest in the same collateral, and one interest is perfected and the other isn’t, the perfected security interest has priority. If both security interests are perfected, the first one to have perfected their interest has priority.
If the borrower physically gives you the collateral, that also perfects your security interest. It has the same effect as a security agreement. It shows the borrower’s intention to give you an interest in the property.
If you are asking for a security interest in the borrower’s property, it is best to check the government registry to see if there are already security interests in the property.
It’s best to put your agreement in writing
Both lender and borrower should have a clear understanding of expectations and repayment terms. Otherwise, problems and hard feelings can arise. A written loan agreement will protect both of you. See below under “Prevent problems” for tips on putting your agreement in writing.
Your agreement can still be legally binding even if you don’t put it in writing. As long as the elements of a contract are present, a verbal agreement is just as valid as a written one. These are the three elements a contract needs to be binding:
- Agreement: The parties must agree on the terms.
- Consideration: Each party must receive something of value.
- Intention: Both parties must intend the agreement to be legally binding.
For more on these elements, see our guidance on making a contract.
A written agreement helps prove these elements are present. Emails, texts or notes can also help prove there’s a valid contract.
It’s also a good idea to keep a record of the transfer itself (e-transfer, bank draft or money order), plus a statement showing the money coming out of your account. These records may come in handy later if you need to prove the transaction happened.
If your agreement is prepared by a lawyer or notary, it can be made “under seal”. A contract made under seal doesn’t need consideration to be binding. If a loan agreement is made under seal, it can still be binding even if you as the lender don’t receive anything of value.
A contract is said to be sealed when the parties show an intention to sign it under seal. This might be shown by attaching a wax seal to the contract or including a clause saying that the contract is "signed, sealed and delivered by the parties".
If you’re lending to more than one person
If you’re lending to more than one person, it’s a good idea to get each person to sign the contract. This ensures that each of them is legally bound by the agreement. Having a third party witness the signatures is ideal, just in case one of the borrowers later tries to argue that their signature was forged.
Step 1. Figure out how much you can lend
Before you agree to help someone out financially, ask yourself:
- How much can I comfortably lend them without sinking my own finances?
- Will I be okay financially if they don’t pay me back?
- How will this affect my relationship with other family members?
Prepare yourself for the possibility that you won’t get the money back. That way if you do, it will feel like a bonus.
Step 2. Be clear on whether it’s a loan or a gift
This is a common point of disagreement when people lend to friends or relatives. A shared understanding is essential from the outset. Ask yourself: Do I expect to get repaid? If so, when? Lay it all out on the table.
Usually, a court will assume that you expect to be repaid and are not giving the money as a gift. However, things get more complicated when money is going to a family member. Making it clear from the outset can prevent any issues from arising down the line.
Step 3. Discuss an interest rate that’s reasonable
The borrower may assume the loan will be interest-free. After all, you’re not a bank. But you are taking on risk. Especially if the loan is for a large amount or for a lengthy period (say, more than 18 months). So it’s completely reasonable to ask the borrower to pay interest. The question is how much.
Try to arrive at an interest rate both of you can live with. That might mean a rate that’s lower than a bank would charge, but high enough to return more than, say, a savings account (which is risk-free).
Step 4. Establish a repayment plan
The borrower should lay out how and when they propose to pay you back. Ask what will happen if they can’t make their payments.
Step 5. If you're taking security, make sure the person owns the collateral
If you're taking security for the loan, make sure the person actually owns the thing they’re giving you as security. Look at the registration papers. You’d be surprised how often ownership is a problem. Also, you should do a search of the government registry to make sure no one else has a secured interest in the property.
Step 6. Get it all in writing
Putting your agreement in writing will protect both sides. It helps both parties be absolutely sure they understand the terms. And it creates a paper trail in case there’s any disagreement in the future.
The written agreement should include:
- the loan amount
- the interest rate
- how and when payments will be made
- what happens if the borrower misses a payment
- when the loan is due in full
You can use our loan agreement template.
To learn more about making an agreement, see our guidance on how to make a contract.
Step 1. Be honest
If you've lent money to a friend or relative and they’re struggling to repay it, be up front with them.
"We've got a situation, but I'm hopeful we can work together to find a solution that suits us both."
Explain your perspective, and the impact on you of not getting repaid. Tell them you want to support them in repaying the loan. Explore revising the repayment schedule.
Step 2. Write a demand letter
If the borrower doesn’t repay the money as promised, you can take steps to collect. The first step is to write a demand letter. It lays out what you think the other person did wrong, and what they can do to resolve the situation.
In the demand letter, explain to the borrower that they haven’t paid the loan back as promised, and they need to do so. Give them a time limit to respond to your demand. (Be reasonable. For example: 10 business days.) Explain what the consequences will be if they ignore the letter. Be firm but cool. This isn’t personal: it’s business.
For example, a demand letter about a loan might say something like this:
I am writing about a loan I made you of ______________ [amount] on ______________ [date of loan] for ______________ [purpose of loan]. Our agreement was that you would pay this loan in full by ______________ [date of repayment]. To date, you have not made any payments. It has now been ______________ [number of days] since the loan was due. The full amount of ______________ [amount] is now due. If I do not receive payment in full by ______________ [give a date], I will take legal action to recover the amount of the loan, as well as interest, filing fees, and any other costs. If you have any questions, please feel free to contact me at______________ [your phone number].
You can use our demand letter template.
You can write the demand letter yourself or ask a lawyer to write it for you. A demand letter sent on a lawyer’s letterhead is often very effective.
Step 3. Change the terms of the agreement
If the borrower tells you they aren’t able to stick to the agreement, consider changing the terms to help them. At law, you aren’t required to renegotiate with the borrower. But, in the long run, it may be the easiest and least expensive option for solving the problem.
If there is no written agreement
If you don’t have a written agreement, discuss revising the terms. Ask the borrower to suggest a new payment schedule that will work for them. Once you both agree on the changes, put the new terms in writing. Sign the written agreement, and have the borrower sign it.
If there is a written agreement
If you have a written agreement, check if it sets out a process for changing the terms. If not, you may choose to add an “addendum”. This is an addition to an agreement that sets out more terms and conditions. An addendum should be signed by you and the borrower and attached to the original agreement.
You could also choose to revise the original agreement. Cross out the terms you no longer want. Write in the new terms, and initial beside the changes. Make sure the borrower does the same. You may choose to get a third party to witness and initial the changes as well.
Step 4. Consider mediation
You and the borrower may want to discuss using mediation to resolve the matter together. With mediation, the people involved in a dispute get together and talk, with a mediator steering the meeting. The mediator helps both parties define the problem and understand each other’s interests. The dispute is resolved only if all the people involved in it agree.
Learn more about the benefits of mediation, and how it works.
Step 5. Consider legal action
If you’ve tried all the above and still can’t solve the problem, your next step may be legal action. You can consider suing the other party for breach of contract.
If your claim is for less than $35,000, you can sue in Small Claims Court. It’s faster and less complicated than suing in the British Columbia Supreme Court.
If your claim is for less than $5,000, it will be heard by the Civil Resolution Tribunal. This is an online system that encourages a collaborative approach to resolving disputes.
If you decide to sue, there are time limitations on filing lawsuits. You should start legal action within two years of when the payments stopped or when the money was supposed to be repaid.
There are steps you can take to extend these time limits and preserve your rights. A lawyer can explain your options, and help you decide on the best course of action. If you don’t have a lawyer, there are options for free or low-cost legal help.
Step 6. Take enforcement steps
If you sue the borrower and get a court judgment, you can take steps to enforce the judgment. These can help you recover the money you’re owed. For example, you can:
- have money deducted from the other party’s wages
- have a court official seize the other party’s property
- make the other party come to court to explain why they have not paid the debt