Expert Advice for Landing/Non-Landing Loans to Corporates
A loan to a family member or a friend is usually unsecured. The terms and conditions are undefined or hazy and demanding payback is difficult. And if the loan goes bad, the relationship also sours. Moreover, such a loan is usually interest-free. This means you lose money. So, most people flinch from giving financial help to their close ones. But what if you draw up a legal document clearly defining the terms and conditions of the loan? This way you can help your friend as well as protect your interests
There are two ways to do this: a promissory note and a detailed loan agreement-
- “A promissory note is an acknowledgement to pay back debt (on demand or otherwise) and may include some simple terms and conditions. If the aim is to include specific or detailed clauses, it is advisable to enter into a loan agreement.”
- Loan documents, however, have to be drawn on a stamp paper and notarised. They let you put as many clauses as you want, such as on collateral, default, termination and inclusion of legal heirs.
(i). Be careful about the wording. Use full names (as they appear in identity proofs such as PAN/voter I-cards) and mention the date and place clearly.
(ii). Points such as tenure, periodicity (monthly, annually, lump sum or in instalments) of payments and how the interest will be calculated (simple, compounded annually, etc) should be phrased clearly. Carry out the transaction through a bank cheque and mention the cheque number in the agreement.
(iii). Unlike a promissory note, a loan agreement can be modified. An amendment clause needs to be incorporated in the agreement. It enables the parties to amend the document on mutually-agreed terms and conditions. “Amendments can be carried out either through written confirmation or a supplementary agreement”.
(iv). There is no legal requirement but it is advisable to get the document signed by a witness, preferably someone not related to any of the two parties. This will hold weight if there’s a dispute.