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.
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.
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
- 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.
- 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.
- 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.
- 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.
- Ben S. Bernanke, Alan S. Blinder M. (1988). Credit, money, and aggregate demand National Bureau Of Economic Research.
- Eichengreen, B., & Mody, A. (2000). Would collective action clauses raise borrowing costs? (No. w7458). National bureau of economic research.
- Elmgreen J., O. (2016). When friendly family loans go bad...' on demand loans Bartier Perry Lawyers.
- Merret A., D (2016). Loans to Children – The riskiest loans of all? Turnbull hill lawyers.
- Mukerjea R., A. (2017). Towards a Friendly Payday Loan
- Elmgreen J., O. (2016)
- Eichengreen, B., & Mody, A. (2000)
- Merret A., D (2016)
Author: Karolina Tabak