When you want to loan out money to your friends or a family member as an act of good faith it is necessary to ensure that your ‘good faith’ is not considered as your weakness and the receivers start to take advantage of it. It is therefore necessary for you to know whether or not there are any laws or any clause in the money lending laws of the government when it comes to loaning money to friends and relatives.
In most of the times you will see that a close one to you will ask for financial help from you, time and again. These types of ‘loans’ are very common in workplaces and even between two members of a family. Based and given entirely on trust, these loans typically do not involve any contractual loan agreement between the two parties. This is where the risks of these loans lie.
Usually, a lot of feelings, thoughts and emotions, and all of these are good ones from both the sides come into play while giving these loans.
The person who borrows expect that you will not reject their request, not charge any interest and even in the back of their mind they will also expect that you will not pursue them aggressively to make the payment.
You on the other hand as a lender will expect that the amount lent will be repaid ‘soon’ though you may not put up any time clause part from a verbal request and affirmation of ‘return the next month.’
These loans typically have no terms or conditions, just trust. However good an act and satisfying feeling it is for both in different points of view, there are a few things that you should consider before loaning any money to your friend, coworker and family member. These are:
Will it hit you all at once?
How big is your urge to be helpful?
How much do you care about the person and that person cares about you?
How much is your concern about getting repaid soon?
Are you wondering whether or not you should afford or want to help this person even to the least?
Why they need the money from ‘you’in the first place?
Is it their real need or just a want?
Are they considering you as the most reliable and accessible source of fund?
Is it a habit of the person to ask for such financial help?
Has he or she has taken money before from you or anyone known to you and have or have not returned it ‘soon’?
That is a long list of questions. This is because such loaning when goes wrong will hit you much more emotionally and hit the relationship more than the amount of money given out, which typically is limited to smaller amounts.
The best thing to do to avoid any unwanted and even unprecedented situation is to act like a professional private money lender such as Liberty Lending and follow their principles of money lending. At the best you can know about the laws regarding such ‘private loans.’
Laws on lending money to friends and relatives
Right at the outset and as a preliminary matter, if you are looking about the laws that governs lending money to your friend and family then it is a significant sign that you should reconsider and give it a second thought about making such a loan.
If you are not interested in making such a loan without caring for the legalities and a proper arrangement then most probably then you have already answered to your question: whether or not you should be making the loan in the first place.
If you think practically and take the advice of experts, you should probably never make such loans. You should also not let anyone borrow something from you that you probably cannot part away with or live without.
Coming back to the legal aspect of lending money to friends and relatives, these laws vary from one state to another. Though most of the lending laws are aimed primarily to regulate the lending activities of those people who lend money to others on a regular basis as a part of their business, called the money lenders, there are a few specific laws that may still have some effect on such ‘private loans.’ Few of these laws include:
Laws against usury or charging excessive interest
The collections methods followed and
The maximum amounts of a loan.
As far as the maximum rate of interest is concerned, this rate will be around 18% or less in a year. Since this rate may vary according to the local statutes, it is best that you check it out to be sure. Sometimes, even a rate fixed for a specific jurisdiction may change over time.
In most of the cases these private loans are made to relatives and close friends on a handshake and that is not enough to make it collectable legally. Typically, you should have proper agreements between you and the borrower.
However, when you make such as agreement, you must make sure that it is done in writing. As per the law if such agreements are not in writing it may run afoul of the statute of frauds that mandates all these agreements must be in writing or else they will be unenforceable. Therefore, stay away from the handshake agreement with your friend or relative as that is not legally binding for a repayment.
Also consider the tax consequences of such a loan as per the law. If in any case you receive any money in excess to the amount loaned out it will considered as the interest on your loan and hence your income that will be taxable. If you do earn such interest you must declare it in your tax files. In case you do not get it repaid, it will be considered a gift to the borrower where both of you will have tax obligations.
Therefore, the best is to stay away from such ‘good deeds’ or have a proper agreement signed if you have to lend to your friend or relative.Updated Date: 30 July 2019, 11:30