The Importance Of A Loan Agreement In Malaysia
2020 has not been a good year thus far, and the recession has inevitably triggered an economic crisis across the globe. As the crisis unfolds, those who are hit hard by the current wave of debt may opt to take out loans to ease their financial burden. Some of you may even have friends and relatives turning to you for a friendly loan, or vice versa.
A friendly loan happens on an informal basis where the parties are usually people in your social circle, and because of this, under these circumstances, a loan agreement tends to be the last thing on anybody’s mind.
While it is understandable that no one wants to make their friends and family uncomfortable with formalities and paper work, just like any other type of loan, it is wise and prudent to draw up a loan agreement in writing, especially if you are the lender.
Here are 3 reasons why you certainly need to prepare a loan agreement if you intend to borrow your money:
1. Record the details of your loan
A loan agreement, at its core, is a contract that documents the ins and outs of your loan. From the amount of the loan to the intended method of repayment, it is important to ensure that all relevant information is recorded properly. When a loan agreement sets out its terms in “black and white”, it can be a reliable reference in the event that one or both of the parties forget about what was previously agreed upon, thus minimising the risks of disputes over the terms of the loan.
2. Plan your loan structure
A loan is a serious commitment no matter the amount. A lender would want to know how the loan will be recovered, and a sincere borrower should promise to pay back that debt. A loan agreement can encourage both parties to discuss about a suitable loan structure. As both parties sit down and negotiate on the terms of the loan agreement, they can also figure out how and when the loan could be repaid. Of course, due to the nature of friendly loans, more often than not there will be some leniency on this issue, such as alternative modes of payment. Having a loan structure essentially gives a sense of certainty to the lender, and the borrower can start planning on how to manage his finances to repay the lender.
3. Proof that your loan exists
A lender’s biggest fear is when the borrower fails to pay back the loan. A friendly loan can easily turn “unfriendly”. As a loan agreement records all the terms of the loan, it is documentary evidence that can be used against the defaulting borrower, whether to demand for payment or if the situation escalates, to take the matter to court. It is not a requirement for friendly loans to have a loan agreement, neither is it a norm to have one in a social setting. However, sometimes trust alone cannot prove that the loan exists, or that the other party has a duty to repay any loan at all. If the borrower is evading the loan, a loan agreement is a credible evidence to safeguard the rights of the lender.
Loan agreements are common in commercial settings, and this should be integrated into informal relationships as well. Unfortunately, most of us have heard of stories about friendly loans that are never recovered. Helping someone who is struggling with their finances is an act of kindness worth applauding, but do remember to always protect yourself. On the other hand, if you promise to pay back a debt, do honour that promise the right way.
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