Friendly loan

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Friendly loan loan between friends, family or colegues, often unwritten and without any legal documentation or authorized procedure. Those type of agreements are made in good faith between closely associated parties. However, in many circumstances failure to repay such loans cannot be legally challenged. In case of default the concerned party (lender) cannot take any legal help from the court or police as there is no legal evidence of such an agreement happening between the two party, in this fact this type of agreement is burdened with risk[1].

Such a loan isn't reported to institutions that monitor credit level, thus it doesn't impact credit score. In some countries such a loan is a subject to taxation, but if no document is created it is difficult to prove that tax should be paid[2].

In order to make sure that the risk of lender is minimal, there should be an written agreement. However that can cost (tax). In case of lack of payments, lender can legally challenge borrower.

The basic goal of friendly loan is to support young people who strive to achieve their goals, but they do not have enough cash to carry out these plans and intentions.It happens that projects for which funds are transferred are implemented abroad, which means that these loans are not limited to the domestic market.

People in need of emergency cash reach for a friendly loan, because this type is not associated with the payment of interest and it is convenient because they can receive this money right away.

How to avoid risk ?

To avoid risk of non repayment the loan, parties could write a formal promissory note or loan agreement documentation of the transaction. The missory note, would be a legal record of the amount borrowed and the terms stating that the borrower will pay back that amount for example: defining the date on which the borrower is obliged to pay the amount due, also the best option will be to determine the exact amount that will be repaid. There is also the possibility of defining the way in which we would like the loan to be paid-for example, transfer to a given bank account number, check or cash withdrawal from hand to hand, however it is inconvenient and with large amounts of installments it is dangerous due to the loss of these money.

Examples of friendly loan

  1. The most common friendly loan occurs between parents and children, because parents want to support their children in new projects, to make their dreams come true, in a better start, for example, money for a flat, building a new home or buying a car. Often, parents can not afford to transfer a large sum of money to their children unrequitedly, which is why they decide on a friendly loan[3].
  2. Young people who decide to study often have a financing problem. it happens that they are in a situation where they lack the money to pay the tuition or the flat and would like to continue their education, then they decide on friendy loan. The main source of their friendly loans are grandparents, because the young at this age do not want to ask for help from their parents. Grandparents, seeing their effort they put on acquiring knowledge, experience and education, give them a friendly loan also during the holidays for their trip.
  3. Young people often get involved in the opening of a new business, but often the need for money exceeds their expectations and they need financial help to improve this venture. In this case, they are most likely to be willing to take out a friendly loan, so as not to have obligations at the bank or other similar institution at the start, but feeling their independence from the family, the main loan center is friends.
  4. Also, we often decide on friendly loan from our siblings or friends in an emergency, in a situation where there is no money deposited and there is a situation where we are forced to make some investment. these are situations, for example, when something important for us breaks down, for example a laptop, a telephone, car or bike that we need for everyday life.

Advantages of Friendly loan

Friendly loans can be an advantageous option in certain situations. Below are the advantages of such agreements:

  • Quick and convenient: Friendly loans are often the fastest and most convenient way to borrow money as the process is often quick and straightforward, with no legal documentation required.
  • Low cost: Such loans usually don’t carry any interest or fees, making them a more affordable option than traditional loans from financial institutions.
  • Flexibility: The terms and conditions of a friendly loan are often more flexible than those of a formal loan. The repayment schedule can be tailored to the needs of the borrower and the lender.
  • Good faith: Friendly loans are often based on trust and goodwill between the parties involved, making them an ideal option for close friends and family members.
  • Privacy: Friendly loans provide the parties with a certain level of privacy as there is no legal documentation involved.

Limitations of Friendly loan

  • Lack of legal evidence: Since the agreement is not backed up by any legal paperwork, it is difficult to take any legal help in case of default by the borrower.
  • Lack of security: There is no guarantee of repayment in friendly loans as there is no collateral involved and this makes them highly risky.
  • Interest rate: Friendly loans are usually provided without any interest rate which can be disadvantageous to the lender.
  • Potential of conflict: Such loans can cause tension between the two parties if not paid back on time and can lead to disputes.
  • Difficult to enforce: It is difficult to enforce the loan agreement as there is no legal framework to back it up.
  • Moral obligations: The lender might have moral obligations to lend the money which can lead to negative consequences.

Other approaches related to Friendly loan

  • Negotiating repayment terms: Before entering into a friendly loan agreement, both parties should negotiate a repayment plan and timeline. This will ensure that the borrower is able to make repayments according to the agreed terms and the lender won't be left without their money.
  • Setting up a payment plan: This should be done to ensure that the borrower is able to make timely payments and the lender will be able to receive the money they are owed. The payment plan should also include how interest and other fees will be paid.
  • Putting the agreement in writing: This is important to ensure that both parties are aware of the agreement and the terms involved. The agreement should contain all the details of the loan, including repayment amounts and interest.
  • Documenting the loan: It is important to keep records of the loan, including the date of the loan, the amount borrowed and the repayment schedule. This will help to prove that the loan exists if any disputes arise.

In summary, a friendly loan should only be entered into after both parties have discussed the terms and put the agreement in writing. It is also important to document the loan to ensure that the loan is legally binding.


Friendly loan — recommended articles
Advance funding — Dishonoured cheque — Tri party agreement — Blocked account — In-House Financing — Cleared funds — Customer deposits — Initial deposit — Principal agent problem

References

Footnotes

  1. ↑ Elmgreen J., O. (2016)
  2. ↑ Eichengreen, B., & Mody, A. (2000)
  3. ↑ Merret A., D (2016)

Author: Karolina Tabak

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