We’ve all had a time in our life when a friend has lent us money, even if it's because you forgot your wallet to buy your food at the school canteen.
But, there are cases where these friendly loans can be for something more substantial, like the payment towards a property.
Given the value of this kind of investment, it’s important to know what are the laws and obligations that might be around one.
This type of loan is widely known as a friendly loan agreement in Malaysia. It’s a form of peer-to-peer lending, where one individual lends the money directly to another, without any bank or financial institution taking part.
Except, in this case, your hero-of-finances is a friend! Now, what could possibly go wrong… Well, the more you know about how one works, the better your loan, and the safer your friendship bonds!
When might a friendly loan agreement apply to property?
A friendly loan agreement can be a particularly helpful part of the property journey when it comes to paying a deposit.
Raising enough funds to cover the required 10% down payment is one of the most significant barriers to property ownership.
It can be challenging for many people trying to save up that sum of money while also paying their everyday expenses such as rent and bills.
That difficulty is why a large number of housing support schemes aimed at helping individuals in the B40 and M40 categories often target down payments as a key pillar of support.
A down payment isn’t the only cost of course, and there are a range of additional costs that must be factored in when considering your property finances.
With all these costs combined, it’s easy to see why some people might turn to friends and loved ones to help them out. That’s where a friendly loan agreement comes into play!
When is a loan considered a friendly loan agreement?
You’ve found that dream home you’ve always wanted! It’s a perfect condo unit in the well-established Damansara neighbourhood that you’ve been hunting for months, but you’re short on your down payment... What do you do?
A friendly loan agreement might become an attractive option. These are relatively easy loans to access, compared to a formal one from a bank.
It's no surprise that this type could easily be seen as an informal affair, where you and a friend shake hands and make an agreement built on trust.
That’s obviously how most friendships work. But when it comes to money, a friendly loan agreement must pass a certain test to ensure the lender doesn’t breach legal guidelines.
Now the first thing to know: Friendly loan agreements are legal in Malaysia. The police aren’t going to swoop from behind a curtain and arrest you for lending your friend cash for food.
You can even charge reasonable interest on just such a loan (although, you probably shouldn’t for that plate of fried rice!).
A one-off loan between friends or family, with a reasonable interest rate, is a completely acceptable legal and financial agreement.
Where trouble might come in is if the lender has lent money to multiple individuals, earning cash from interest, or operating like a business would.
Only businesses and individuals appropriately registered under the Moneylenders Act 1951 can carry out money lending as a business.
There are a few simple tests you can ask yourself about lending/borrowing money under a friendly loan agreement:
Do the lender and borrower know each other well?
Is the interest rate (if any) reasonable?
Has the lender made multiple loans to other people in the past?
Is the lender making a profit from regularly loaning money?
The question of interest can obviously be challenging between friends and family. As stated, it's completely legal to charge such interest, and it’s reasonable to assume this could cover lost interest that the money could otherwise be earning – essentially balancing the cost of the loan for the lender.
However, the higher the rate that interest is charged at, the more likely it is that a transaction could be seen by the courts as the lender operating a loan business.
Making a friendly loan agreement formal
Ensuring that a friendly loan agreement is formally written down and secured, is the best way forward for both parties.
This helps avoid any confusion that could cause arguments later down the line. This is particularly true for a substantial loan for property reasons, which might take yearsss to repay.
That written document should include some key information as standard, following the friendly loan agreement sample details below:
Name of the borrower
Name of the lender
Total value of the loan
Agreed payment schedule
Interest rate (if any)
Late payment interest rate (if any)
Deadline for final loan repayment
Note of collateral security (if any)
That last point about collateral is particularly important for the lender. Although friendly loan agreements are based on trust, a little bit of security or collateral can go a long way in making sure that trust remains.
One potential option is to enlist a guarantor for the loan. Essentially, this additional individual (usually with ties to the borrower) acts as a guarantee to cover the full value of the loan if the original borrower fails to pay. This gives an additional layer of security for the lender.
Another potential option is to secure the loan against land/property. This should be noted within the written document, and should require the borrower to deposit the land title with the lender or their legal representative.
This is then secured with what’s known as a lien-holder’s caveat. Basically, that’s a piece of legal jargon referring to a note of interest against land, registered with the Land Office.
If the borrower defaults (read: runs away!) on the loan, the lender is then legally secured against the value of that loan from selling off the land or property.
A third option is to secure the loan against the value of shares in a business. Under this agreement, a borrower agrees to transfer an amount of shares to the value of the loan, or sell the shares to cover the value of a debt, in the event of a default.
A final point – don’t forget the stamping process! Having your document legally stamped ensures it is admissible in court if all else fails.
What happens if I don’t have a formal agreement but my friend won’t pay me back?
Things CAN get a little sticky if loan agreements with friends go sour. Not only is your friendship at risk, but so is your money if you’re the lender in this arrangement!
A formal agreement goes a long way in preventing that, but what do you do if no such written agreement exists? The good news is, you’re not totally at a loss.
If you have no formal written agreement, the responsibility is on the lender to prove to the courts that a loan obligation existed. You'll have to prove:
Money was indeed loaned to your friend
That the loan was not simply a gift
An obligation to repay that loan was agreed
Let’s hope you saved those WhatsApp messages! This kind of difficulty in proving a loan obligation is why a formal loan agreement is a really good idea.
The first step of a dispute should always be communication. Speak to your friend about why you're having trouble/they're having trouble paying back the loan.
Mutual understanding is, by far, the best way to resolve any financial disagreement. If that doesn’t resolve the issue, the next step is potentially the legal route.
1) Small claims
If the claim is under RM5,000, then a small claims procedure is the best way forward.
Small claims for under RM5,000
Complete form 198 to file legal action and claim against an individual
Submit four copies of form 198 to the Registry of Magistrates’ Court
Pay RM10 fee
Applicant serves a sealed copy of the form to borrower
Formal hearing decides the case
2) Civil court
If the sum involved is more substantial, up to RM100,000, then you may need to hire a lawyer to pursue your claim under the Magistrates Court.
Issue a letter of demand to formalise your claim
Seek advice from a lawyer regarding your claim
Consider costs of legal proceedings versus value of claim
Engage lawyer, who applies the claim to courts
A writ (statement of claim) issued by courts
Legal hearing undertaken at court
Ruling is given by courts
3) Sessions Court or High Court
It’s unlikely a friendly loan agreement will exceed the maximum for Civil Court, but in the event your loan covers a value from RM100,000-RM1,000,000, the Sessions Court will be required. For loans over RM1,000,000, proceedings will move through the High Court.
4) Execution proceedings
If a borrower fails to settle a judgement sum upon the ruling of the courts, then a lender may apply for further action within 12 years of the ruling under execution proceedings, through the following mechanisms:
Insolvency proceedings – filing bankruptcy proceedings against the individual.
Writ of seizure and sale – to earn compensation through sale of assets such as cars/property.
Judgement debtor summons – whereby the court issues a new summons and undertakes a hearing to assess the ability to repay the debt.
Court order for sale – for sale of property held under any lien-holder caveat.
Is a friendly loan agreement a good idea?
There are literally thousands of loan agreements between friends made every single day in Malaysia, from RM1 for a nasi lemak to RM10,000 to support a property down payment.
The ability to help our friends and family, and be helped by them, is fundamental to the way we live our lives. But that doesn’t mean we should be completely blind to the challenges these situations can create.
The best practice in establishing a friendly loan agreement is always:
Clearly agree on the amount, and repayment obligations
Document your loan agreement
Ensure security is given against the loan where possible
Communicate clearly if there are challenges in repayment
So overall, is it a good idea? It’s up to you to decide, but here are some quick pros and cons to consider:
Easy to access loan.
May put financial pressure on a friendship.
Rapid access to financing.
Usually no detailed assessment of ability to repay loan.
Benefit from support of friends and family.
Can cause difficulties if agreement is not formally recorded.
No extensive loan assessment.
Challenges around reclaiming value of loan if the borrower is unable to pay.
Simply documentation compared to formal loan agreement.
Risk of lender breaching rules of Moneylenders Act 1951.
Is legally recognised in Malaysia.