A friendly loan is a loan between two people based on mutual trust, for instance, between friends or family. Friendly loans, in common practice, is often informal and might lack documented agreements between the lender and borrower, and does not involve any financial institutions. Friendly loans can be made in a small scale manner or for major matters like payment towards properties or automobiles.
You may ask if a friendly loan is legal in Malaysia in the first place. Friendly loans are well in fact legal in Malaysia, as it is recognized and enforced by the law as a valid contractual agreement between the lender and the borrower, and is governed by the Moneylenders Act 1951 . Based on the law, parties who offer friendly loans are permitted to charge reasonable interest, but are prohibited from making a business out of money lending.
Although a friendly loan may seem like a convenient and viable means of aiding in your financial aspects, there may be cases where a friendly loan may not be so ‘friendly’ after all. Here are several factors to be aware of before going through a friendly loan.
Is The Friendly Loan Conducted In An Illegal Manner?
A friendly loan may be considered ‘illegal’ if the lender offers loans to multiple individuals and charge a significant amount of interest, or offering the loans in a business scale. A legal money lender, be it individual or in a business should be registered under the Moneylenders Act 1951. A money lender who is not registered under this act is alleged to be lending money illegally and is committing an offence, and is often known as a ‘loan shark’.
Based on Section 5(2) of the Moneylenders Act 1951, it is stated that, “Any person who carries on business as a moneylender without a valid license, or who continues to carry on such business after his license has expired or been suspended or revoked shall be guilty of an offence under this Act and shall be liable to a fine of not less than twenty thousand ringgit but not more than one hundred thousand ringgit or to imprisonment for a term not exceeding five years or to both, and in the case of a second or subsequent offence shall also be liable to whipping in addition to such punishment”.
Making a Formal Friendly Loan
Although a friendly loan is deemed to be based on mutual trust, it is always recommended to have proper documentations to allow for a safer and more secure process to avoid any mishaps in the long run.
The best option is for all parties involved to sign a ‘Friendly Loan Agreement’.
A formal friendly loan agreement may be drafted by a lawyer or you may opt to come up with an agreement of your own.
The main details that should be drafted in the agreement are:
- The parties involved
- The amount of loan
- Interest chargeable (if any)
- Repayment Date/Schedule
It is also advisable to provide additional supporting documents such as bank slips or transaction proof, which could act as evidence in worse case scenarios.
Not sure how to create a friendly loan agreement? Use our templates here!
