Can I Give an Interest-Free Loan to a Family Member?

It’s not unusual for parents to want to help their children financially, perhaps to buy their first home, start a business, or get through a tough patch. Often this help comes in the form of an interest-free loan or even a handshake agreement.

You can give an interest-free loan — but documentation matters

There’s no law preventing you from giving an interest-free loan to a family member in NSW. You don’t need to charge interest, and you can set the repayment terms however you like.

However, what’s important is how you document the loan. If the arrangement is informal — for example, simply transferring money with a verbal agreement — it can become very difficult later to prove that the money was ever intended to be repaid.

To strengthen your position:

• Have a written loan agreement that sets out:
  • The amount loaned
  • Whether it’s interest-free
  • The repayment terms (dates, instalments, or upon sale of a property)
  • What happens if repayments are missed
• Both parties should sign the agreement and ideally have it witnessed.
• Keep records of all payments and communications relating to the loan.

Even a simple written agreement can make a major difference if the loan later becomes disputed.

How the Family Court typically views “informal” family loans?

What happens if that child later separates from their partner? Will the Family Court treat the money as a loan that must be repaid, or as a gift that’s effectively gone? Let’s look at how this plays out in the Family Court.

When couples separate, one partner may claim that money received from a parent or relative was a loan that needs to be repaid, while the other insists it was a gift.

The Family Court looks at the substance of the transaction, not just what the family members call it.

The Court will consider factors such as:

• Was there a written loan agreement?
• Were there repayments made or expected?
• Were there terms such as security, interest, or due dates?
• How did the parties treat the money in practice — as a debt or as part of their joint assets?
• Was there any expectation of repayment at the time?

If the arrangement was informal and undocumented, the Court is often reluctant to treat it as a genuine loan. In many cases, these “loans” are characterised as gifts or financial assistance, particularly if:

• There was no clear repayment plan, and
• The money was used for family purposes.

The practical effect in property settlements

If the Family Court finds that the money was a gift, it will usually be treated as a financial contribution by the recipient spouse (or their family) to the relationship. That can affect how the property pool is divided, but it won’t be repaid to the lender.

If it’s found to be a loan, the amount may be treated as a liability in the property pool — meaning it must be repaid before the remaining assets are divided.

In short:

• Gift → stays in the property pool
• Loan → deducted as a debt before division

How to protect your family’s interests

If you’re considering advancing money to a family member, especially one in a relationship, here are some practical steps:

• Put it in writing — a clear, signed loan agreement is the best protection.
• Set repayment terms, even if flexible.
• Keep communication and payment records.
• Consider registering a mortgage or caveat if the loan relates to property.
• Seek legal advice specific to your unique circumstances before transferring funds — a short consultation can prevent long disputes later.

Helping family is admirable, but without proper documentation, a generous interest-free loan can easily become a costly misunderstanding.

The Family Court doesn’t automatically recognise informal, interest-free loans between family members as enforceable. The key is to treat the arrangement as you would with anyone else: write it down, sign it, and keep records.

If you’re planning to lend or have already lent money to a family member and want to know how it might be treated in a separation or property settlement, it’s best to seek independent legal advice early.

Contact us for a free thirty-minute consultation with a lawyer.

Any information on this website is general in nature and should not be taken as personal legal advice. We recommend that you speak to a lawyer about your personal circumstances.

Photo by Luke van Zyl on Unsplash