How To Make A Friendly Loan Agreement In Malaysia
How To Make A Friendly Loan Agreement In Malaysia
A friendly loan is a situation where one individual lends he money directly to another individual, without any bank or financial institution taking part.
The law recognizes it as being a valid contract, thus enforceable under the law. Here we discuss some of the ways to take note and protect yourself in the event of a default when you provide a friendly loan to your friend.
- Have proper documentation drawn up
It is important to have all the basic terms of the friendly loan sent up in a document/letter or agreement with your friend. This is necessary to safeguard your own rights in case there is a default by your friend. In the case of Tan Aik Teck v Tang Soon Chye [2007] 6 MLJ 97, the COA stated that a friendly loan is a loan between two persons based on trust. However, there should be an agreement such as an I.O.U or security pledged between the two persons on repayment.
In Kam Seng Realty Sdn Bhd v Dato Tai Fatt Yew & Anor [2012] 7 MLJ 925, the Court did mention that it needs credible evidence as well as necessary documentation to prove the existence of a friendly loan between parties.
- No exorbitant charge or excessive interest
As a general rule, interest should not be charged on a friendly loan so that it does not allow the lender to take advantage of the borrower.
However, with that said, a reasonable interest can be charge by the lender but it must be proven that the lender is not profiting from the interest like what money-lending businesses are. Further, lenders should not wait until the interest is compounded into a hefty sum before initiating an action in Court.
- Have a fixed period for repayment
This is to have certainty in the repayment period where once a default has happened, the lender has 6 years limitation period to recover the debt in Court. Once the limitation period has expired, the lender is unable to recover the debt.
In the event there is no fixed period for repayment, the limitation period will be 6 years from the date of the loan given by the lender.
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