- Legal Document
Don’t lend money without a legal document. Legal document for this type of loans would be loan agreement or promissory note. It should be made legal document and stamped by legal personnel.
- Personal Information
The document should clearly capture identity proof such as ID card number of both lender and borrower.
- Repayment Schedule & Interest rates
Your document should clearly mention about repayment schedule monthly, yearly or lump sum. Along with periodicity or repayment, It should also mention interest rates applicable on loan amount.
- Dispute and Exclusion conditions
The legal document may or may not include a condition in case of dispute or default. One should also mention exclusion condition if any.
A loan agreement or promissory note can be modified/amended by mutual agreements between lender and borrower. You can make provision of amendment clause in the agreement.
There is no legal requirement of a witness in the loan agreement or promissory note. However, as an additional safety get the document signed by a witness. The witness should not be related to any party.
- Payment via bank transfer
Make sure to pay money via bank transfer for transparency and reference the amount in the legal document.
- Interest on Tax Component
Interest-free loans are non-taxable for both lenders and borrowers. However, if a provision of interest is kept lender have to pay tax on interest earned.
- Loan without Interest
Loans without interest from friends and relative are considered as Gift. Gifts from family members are not taxable.
Additional Food for thought before lending money to friends and relatives
- You should assess the capacity of the borrower to pay loans in the future.
- You should remember that there are chances that you can lose relationship because of these types of loans.
- If a relationship is important consider loan as a gift. Assess your capacity and lend the amount which you are capable to write off.
- You can earn more money if you invest this money in other instruments as mutual funds/equity.
- Over to You
Source: https://moneyexcel.com/18894/lending-money-friends-relative-points-must-consider. (The information in the original article has been updated in line with modern methods of banking)