Things to keep in mind before lending money to a family member or a friend
A loan to a family member or a friend is usually unsecured. The terms and conditions are undefined or hazy and demanding payback is difficult. And if the loan goes bad, the relationship also sours. Moreover, such a loan is usually interest-free. Make sure lending to a family member does not become a headache.
“Neither a borrower nor a lender be; for loan oft loses both itself and friend.”
The advice by Polonius, the chief counsellor to King Claudius in Hamlet, had good reasoning behind it.
A loan to a family member or a friend is usually unsecured. The terms and conditions are undefined or hazy and demanding payback is difficult. And if the loan goes bad, the relationship also sours. Moreover, such a loan is usually interest-free. This means you lose money.
So, most people flinch from giving financial help to their close ones. But what if you draw up a legal document clearly defining the terms and conditions of the loan? This way you can help your friend as well as protect your interests .
There are two ways to do this – a promissory note and a detailed loan agreement .
“A promissory note is an acknowledgement to pay back debt (on demand or otherwise) and may include some simple terms and conditions. If the aim is to include specific or detailed clauses, it is advisable to enter into a loan agreement,” says Gurmeet Singh Kainth, partner, D H Law Associates, a legal firm based in Mumbai.
Both are legally valid documents and are accepted by courts in case there’s a dispute.
DRAWING UP THE DOCUMENT
If you want to keep it simple and only for the record, go for a promissory note, an unconditional promise by the borrower to pay a fixed sum on demand or at a specified date. (more…)