Let’s say, you had been approached by a friend, a sibling, a relative, a colleague, or even your child who is now an adult for financial support. So, the question is, ‘Would you lend him or her your money?’.
Well perhaps, you are willing to lend as you are a charitable person. However, it is possible that you are reluctant to do so. Here, I believe that if you were asked to lend money, you had been inconvenienced. Thus, in this article, I would offer a list of 7 considerations that you can use as a guide so that you could make the most suitable decision on this matter. They are as follows:
#1: Are You a Kind-Hearted Person?
First, it is possible for some kind-hearted souls to be overly empathetic and give the needs of others a priority over theirs. For such ‘baik hati’ people, they could lend out of compassion and be prone to financial abuse by malicious people. So here, the question is, ‘Are you one of such people?’. If you are, you may need to get counseled by wiser people who are for you. Such counsel might protect you from losses as a result of lending money to financial bullies.
#2: What is His Purpose of Borrowing Money?
A responsible person is one that takes care of his finances. He takes this subject of borrowings seriously and thus, he will not ask for borrowings loosely. But, for some people, life throws them a curveball and as much as they try to mend, fix, or solve their financial issues, they fail and need assistance. If that is the case, it would be okay to offer your support to him, if you choose to.
But, if the person is one that spent lavishly, flaunted wealth, gambled, and all in all, had been financially irresponsible, the key question is, ‘Should he be offered a financial bailout?’. More importantly, are you the one bailing him out? So, this is something that you need to consider as I believe that most of us will wish our money to be used purposely for ‘genuine assistance’ and not be wasted away in haste by people who are irresponsible in the first place.
#3: Would Our Relationship be Soured if I Refuse to Lend?
Some lend money because they value friendships and relationships. Worse still, some might be afraid of being labeled as stingy, if they refuse to lend money. To them, saying no to friends and relatives can be difficult as they might be hurtful and unpleasant to them. So, it is easier for them to lend money.
Here, do not fall into such ‘guilt trap’. All of us have the freedom to choose how, what, and where to spend our hard-earned money. It is ours to decide. So here, if you choose to refuse lending to your friends or relatives, it is perfectly okay. It is not right for your friends or relatives to call you a stingy person. Look. If these people label you as such, there is no point in you keeping them as a friend or as a relative. You should find and surround yourself with better friends who would not abuse you like that.
#4: What if You Choose to Lend Money?
Let’s say, you agree to lend RM 10,000 to your friend or relative. As such, would you just transfer RM 10,000 into his or her bank account?
Well, many did so as it was convenient. But, that may not be smart. Here, if you decide to lend money, it is advisable for you to have a ‘friendly loan agreement’ between you and your borrower. The agreement is recognised and governed by the Contracts Act 1950 and it could protect your interest as a ‘lender’.
You may engage a qualified legal practitioner to draft out such an agreement. In that agreement, it should contain the following information:
1. Identification details of both the borrower and lender.
2. The loan amount.
3. The method of how the money is transferred to the borrower.
4. The agreed payment schedule of the loan.
5. The imposition of interest rate, if any.
6. The specification of collateral involved, if any.
Also, it is recommended to have 1 or 2 witnesses to sign the agreement and get the agreement stamped. You may want to keep a copy of the transaction slip of the money lended and repaid. All of these documents are crucial especially if in the event of a dispute, you have a better chance of recovering your capital from your friend or relative. So, it is best to not be penny wise, pound foolish.
But, what if your friend or relative refuses to sign the agreement?
Well, that should act as a red flag to you. This is because documentations are to protect the rights for both lenders and borrowers as they can reduce ambiguity. So, if your friend and relative tries to talk you out of such agreement, that could indicate their attitude towards your money.
It can be a blessing to you if they decide not to borrow money from you.
#5: How Much Interests Can You Charge?
Some of you might forgo FD interest or investments due to lending money. That is an opportunity cost to you and thus, the question is, ‘Can you charge interest on such lending and if so, how much should you charge?’.
Well, firstly, we need to be mindful of not acting as unlicensed moneylenders in Malaysia. So in practice, the interest rate imposed should not be exorbitant and excessive. Remember, you lend to help a friend or a relative who is in need. You are not lending to capitalize or profit from his or her predicament. So, what you could do is to impose an interest, which matches (or is lower than) our local financial institutions.
Also, do take note of the tax implications for such interests, if you impose it into your friendly loan agreement.
#6: How to Recover Defaulted Loans?
Of course, we hope that our kindness is repaid and not taken for granted. So, as a lender, we hope that our friend or relative could repay our capital and make a recovery from their financial predicament.
But sadly, our loans can be defaulted or unrecognized by these borrowers. So, it is a case where our trust is betrayed. Thus, the next question is, ‘Could we have our money back from these borrowers?’. Or, should we write it off and have the defaulted capital as a form of ‘donation’?
Well, it depends on your situation. Here, let’s say, you are keen to have the sum of money back from your borrowers. There are several legitimate ways that you can recover this capital back from your borrowers. They include:
1. Issuing a letter of demand.
2. If the above fails, you may file a lawsuit against this borrower.
3. Upon getting the judgment, you may enforce this judgment through a writ of seizure and sale or garnishee proceedings.
#7: What if the Borrower Passes Away?
Will his debt (Your Capital) disappear or vanish in thin air?
The answer is no. This debt is still in existence, even after the borrower’s death. So, if the borrower passed on, his assets shall form part of his estate. If he has a will written, the executor of his will will manage his estate and settle your debt by repaying you your capital, before distributing the rest of the estate to his beneficiaries.
Otherwise, if he passed on without a will, an administrator will be appointed to manage his estate. This administrator would similarly manage the estate and has to first repay the capital to you. So in short, you will still have your capital back. But for your case, the repayment of this capital will likely be faster, if the borrower has a will.
Conclusion: To Lend or Not to Lend?
I would leave that to you to decide. Here, if you choose to lend money, I believe it is smart for you to protect your interest. Such protection can be boosted if we have proper documentation of all related transactions. This would be helpful to us, especially if we are required to put our case in order to recover our money. I would say that you can engage a qualified legal professional to help you on this. For more information, you may contact:
Ms. Voon Su Huei
Principal Associate of Thomas Philip