What is a friendly loan agreement and is it legal?
A friendly loan agreement consists of the lending of money between two or more parties based on mutual trust. Friendly Loan Agreements are legally valid in Malaysia. Parties are allowed to provide loans and even charge interest on them, as long as the lender is not engaging in money lending as a regular business. Money lending as a business requires the necessary licenses issued under the Moneylenders Act 1951.
As a lender, how can you better secure your loan?
To safeguard against borrowers failing to repay the loan, lenders can ensure that borrowers agree to provide security in exchange for the loan. Three common methods of security are Personal Guarantees, Land and Shares.
- Securing with Personal Guarantees:
One straightforward method is to have the borrower bring in a third party as a guarantor for the loan. If the borrower defaults, the lender can call on the guarantor to recover the remaining loan sum. The guarantor can be an individual or a company, and their financial stability is crucial for a higher likelihood of loan recovery.
- Securing with Land:
Using immovable property as security for the loan is an effective method. This involves preparing a Friendly Loan Agreement with specific clauses stating that the borrower agrees to use their land as security for the loan and will deposit the original land title with the lender or their lawyer. The lender then registers a “Lien-Holder’s Caveat” with the Land Office to become a secured creditor.
If the borrower defaults, the lender can sue for the outstanding sum, obtain a judgment, and apply to the Court for an Order for sale. The property will be sold, and the lender can recover the outstanding balance from the sale proceeds.
- Securing with Shares:
Friendly Loan Agreements can also be secured with shares in a company. The lender prepares a share charge document to create security over the shares, allowing the lender to transfer or sell the shares if the borrower defaults.
Before accepting shares as security, the lender must ensure the company’s articles of association allow such security and obtain all necessary corporate approvals and board resolutions. Additionally, the lender should check if the shares have existing charges by other companies or banks, as this could affect the security’s validity.
Conclusion
Friendly Loan Agreements are legally valid and can be a helpful way for the public to assist each other in times of need. To avoid breaching the Moneylenders Act and to secure the loan effectively, it is crucial for lenders to draft the agreement carefully and consider options like collateral security for loan recovery.
