If I get a loan document signed by both parties showing the borrowed amount and return date, will that document be a legally binding contract?

Question Details: If I lend money to a friend and get a document signed by both parties showing the borrowed amount and return date, will that document be a legally binding contract? Will I be able to take my friend to court if they fail to repay? As much as I would hope that situation never comes, I want to make sure that I can recover the money. I am also thinking about including that their house will be the guarantee.

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Answers by Lawyers

Community Law Wellington & Hutt Valley

Yes it's possible, but the better the contract, the easier it will be to enforce if you need to.

Technically, you don't have to have a written contract, but if you need to recover the money you've lent later, a written contract will be a huge help. We would strongly advise you against relying on a verbal agreement.

You and your friend should also consider getting independent legal advice before you enter into this loan. This means you talk to your lawyer, and they talk to their lawyer separately, about the pros and cons of entering into this loan.

If you decide to go ahead, you should get these basic terms down in writing:
- who the parties to the contract are: you, the lender, and your friend, the borrower
- how much money is being lent, and the date of the loan
- if the loan is for a specific purpose, what that purpose is, and what will happen if the money is used some other way
- how and when the money will be repaid
- whether there will be any interest on the loan
- what will happen if the loan payments aren't made on time, or aren't made at all
- anything else you think might be helpful or might be disputed in the future
- what legal advice you and your friend have taken.

You should also set up a system for recording loan payments that you receive, so that there's no argument about what's been repaid.

You mention using your friend's house as a guarantee. This is basically a mortgage, so you should definitely talk to a lawyer about this, as you'll need a lawyer's help to register your interest on the title of the property. If this isn't done, the guarantee may be useless.

If you later need to recover the money you've lent, you can go to the District Court for amounts up to $200,000. Click here for more information about the District Court: www.courtsofnz.govt.nz. The Disputes Tribunal can't help with recovery of debt.

Before you lend the money, remember that if you need to go to court it may take a long time to get a decision, and recovery may be by way of payment over time. This could seriously affect your friendship.

Consider talking to your friend about other options, such as borrowing money from a bank or talking to a financial advisor. There may be a way you can help your friend out without risking your friendship.

Answered 26 Nov 2012. The IMPORTANT NOTICE below is part of this answer.

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