Making a personal loan to someone whilst a noble act, can also carry significant risks. Even if you have a personal relationship with the borrower, it can be frustrating if they are either not complying with the terms of the loan, or not making any repayments at all. Further, it can cause damage to your own financial situation.
Read on to see what steps you can take to commence recovering the debt owed to you.
1. Check the Terms of the Loan
It is always worth putting a loan in writing. Check what agreement was made on repayments. For example, does interest apply? How many repayments can be missed before they can be determined to have defaulted on the loan? At this point, you may also want to have the terms of the loan reviewed by a lawyer to see what recourse you have in enforcing the terms of the loan.
If the loan is unsecured, then it means that the borrower has not provided any security in the event that they cannot repay the amount owed.
If you are a lender, then loaning funds under a secured loan is always a safer option. This means that the borrower offers up an asset as ‘security’, meaning that if they default on their repayments, you can use the security to repay the loan. For example, if you were loaning someone $10,000, they could nominate their car as security. If they do not pay back the $10,000 you can possess their car and retrieve the money from the sale price of the car.
2. Determine Whether you can Prove it was a Loan (and Not a Gift)
Although the Courts acknowledge that loans can be made verbally, it is always safer to have the terms of your loan agreement in writing. If your loan was made verbally, you will have to prove that it was a loan and not a gift. Ways of proving this can be by:
- Screenshots of messages or emails where the borrower has acknowledged that it is a loan, or where you have conveyed that the money was intended to be a loan
- Evidence of any amounts paid back to you so far, demonstrating there was a loan repayment system in place
3. Send the Borrower a Gentle Reminder and Offer an Alternative Payment Plan
Remind the borrower that they have money outstanding owed to you. Further, you can explain why you need it repaid to you in the time frame given due to your own financial commitments. Hopefully at this point, the borrower will provide adequate reasons for why they haven’t been paying up. If they refuse to pay, explain to them that you will take legal action if necessary to recover the debt, but that you hope it doesn’t get to that point.
If you suspect that the borrower is not making repayments because they cannot afford to, offer to set up an alternative payment plan. This may mean reducing the amount of monthly repayments from $500 to $100 and it may take them a lot longer to pay off the loan, but it also means that you will at least eventually get your money and you won’t have to commence any legal action against the borrower. Commencing proceedings beyond being costly, can also permanently damage relationships between people.
4. Send a Demand Letter
At this point you should send a demand letter detailing the debt owed, the terms of loan and attach the evidence you have that the money owed was not a gift, but a loan. Also state that if they do not start making efforts to repay the debt within a certain period of time (say, 21 days), you will proceed to step 5.
5. If All Else Fails…Lodge a Claim
Every state in Australia has a relevant Court where applications to retrieve debts can be resolved. In NSW, you would apply to the Small Claims Division of the Local Court if the loan was less than $10,000 and the General Division for amounts of between $10,000 and $60,000. By doing this, a Court can make a judgement that the borrower owes you the amount loaned, and also add in costs for lodging the application. If the borrower has no assets and they do not comply with the order, you can file to have them declared bankrupt by the Courts. If the Trustee decides to sell the borrower’s assets to repay their debts, you will likely recoup your money this way.
