“Lend money to friends or relative and invite worry in the return.” Lending money to friends and relative is common practice nowadays. From small amount to meet emergencies to large sum given to recover from business losses, everything is done without paperwork in an unsecured manner on the basis of trust.
Let me share one incident with you. Before few days I got a call from one of my family member. He was in trouble and was in need of money. He described his situation that he has taken money from a moneylender at 5% monthly interest and as he is unable to pay loan amount. Now, he wants interest free loan from me for the longer duration. Well, my immediate response to this proposal was NO. My relative gave counteroffer by saying we will make legal document clearly defining terms and condition of the loan. I am thinking about that proposal.
These types of incidents of giving a loan to friends and relative with or without legal paperwork on the basis of trust are increasing. Most of the time it is seen that these type of loans are the main reason for spoiling a relationship. Well, it’s up to you to extend help to friends or relative by giving a loan. In this post, let’s focus important points you must consider while making a legal agreement for lending money to friends and relatives.
Points to check before lending money to friends or relatives
- Legal Document
Don’t lend money without a legal document. Legal document for this type of loans would be loan agreement or promissory note. It should be made on stamp paper and notarized by concern authority.
- Personal Information
The document should clearly capture identity proof such as PAN card, Aadhaar card of both lender and borrower.
- Repayment Schedule & Interest rates
Your document should clearly mention about repayment schedule monthly, yearly or lump sum. Along with periodicity or repayment, It should also mention interest rates applicable on loan amount.
- Dispute and Exclusion conditions
The legal document may or may not include a condition in case of dispute or default. One should also mention exclusion condition if any.
A loan agreement or promissory note can be modified/amended by mutual agreements between lender and borrower. You can make provision of amendment clause in the agreement.
There is no legal requirement of a witness in the loan agreement or promissory note. However, as an additional safety get the document signed by a witness. The witness should not be related to any party.
- Payment via Cheque Only
Make sure to pay money via Cheque only and mention transaction amount and cheque number in the legal document.
- Interest on Tax Component
Interest-free loans are non-taxable for both lenders and borrowers. However, if a provision of interest is kept lender have to pay tax on interest earned.
- Loan without Interest
Loans without interest from friends and relative are considered as Gift. Gifts from family members are not taxable.
Additional Food for thought before lending money to friends and relatives
- You should assess the capacity of the borrower to pay loans in the future.
- You should remember that there are chances that you can lose relationship because of these types of loans.
- If a relationship is important consider loan as a gift. Assess your capacity and lend the amount which you are capable to write off.
- You can earn more money if you invest this money in other instruments as mutual funds/equity.
Also Read – How to Stop Living Paycheck to Paycheck?
Over to you –
As per me, lending money to relative or friend is not a good idea. You may end up losing a relationship, money or both. Still, if you have decided to give a loan to lend money to relative or friend please remember points which we have discussed above.
Have you lent money to relatives or friends? What was your experience? Would you do it again?