Yeo Law Chambers

Legal Articles

Friendly Loan Agreement

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“Mr. Yeo, it is legal for me to lend money to my relative or friend and collect interest?”

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1. During the pandemic, there has been an increasing trend in relation to money lending and debt recovery questions asked by our clients.

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2. There are tons of reasons behind money lending. One of the major reasons is that many business owners require extra cash to maintain their businesses’ overheads as their businesses sales are declining during the pandemic. For individuals, some are choosing to lend money from their relatives and friends for personal reasons such as to pay for medical bills, bank loans, etc which requires a substantial amount of money in a very short period of time.
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3. In Malaysia, although a friendly loan amongst friends and relatives does not contravene the law, however, it should be noted that if the friendly loan between two parties involves unreasonable interest, it could still constitute a “commercial moneylending transaction” and thus a criminal offense, if the lender does not have the relevant license.

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  • Hence, it is still permissible to charge interest in a friendly loan arrangement?
  • What amounting to unreasonable interest in a friendly loan arrangement?
  • It is necessary for friendly loan to be put in writing?

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ANSWER

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4. According to the decided case, the starting point is this, there ought to be no interest charged on a friendly loan as to maintain its distinction from a “moneylending transaction”.
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5. Further, according to Section 100A of the Moneylender Act 1950, when there is an allegation that one of the parties is money lender with interest involved, the Court will presume that it is a moneylending transaction as defined under the Act.

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6.In the case where the lender is later found to be involved in money lending transactions without the relevant license, the entire transaction will be considered illegal and cannot be enforceable. Not only that the lender would not be able to collect the interest, he/she also may be charged under Section 5 of the Money Lending Transactions Act for breaching the law.

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Question 1 & 2: It is illegal to charge interest in a friendly loan arrangement? What amounting to reasonable interest?

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7. The answer is negative, according to the decided cases, there could still be interest chargeable in a friendly loan arrangement.

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8. Nonetheless, the interest chargeable shall be a justifiable and reasonable interest rate. What is a reasonable rate of interest will be based on the facts of each case. The guiding principle is that the higher the interest is, the more likely the Court will deem it as a commercial moneylending transaction, as compared to a friendly loan which shall be based on a personal relationship between the parties. See: Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd [2017] MLJU 526

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9. Hence, in conclusion, in the situation where the borrower has failed to repay the money and monetary interest is involved, the lender would face a legal burden to rebut the presumption. He needs to prove that it is indeed a friendly loan rather than a money-lending transaction between him and the borrower. The interest is only recoverable if he is able to prove that the interest rate is reasonable.

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Question 3: It is necessary for friendly loan to be put in writing?
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10. When taking legal action against the borrower, the lender has the legal burden to prove the existence of the debt.

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11. In the situation where the friend loan was based on verbal agreement between the parties and the money was released to the borrower vide cash. It could be very challenging for the lender to prove such a friend loan exists between the parties.
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12. The reason is that the borrower may simply deny such a friendly loan exists or just claims that the money transferred by the lender was for investment purposes, and he does not have any duty to refund the same to the other party since the investment plan has failed.

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13. Therefore, it is advisable for the lender to engaged a lawyer to prepare the friendly loan agreement. The existence of a written friend loan agreement can prove such transaction exits thus safeguard the interest of the lender. This was recognized by the Court in the case of P’ng Hun Sun v. Dato’ Yip Yee Foo [2010] 1 LNS 1974

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14. Other than this, the lender can insert the repayment scheme/ dates in the written friend loan agreement. This will provide him a right to bring legal action when the borrower default in making the payment.  Further, a written an agreement is also allowed the lender to secure his payment by requesting the borrower to use his land or shares as security for the friend loan.

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These are the information regarding friendly loan that we would want to share with you today. If you have any inquiries about it, please do contact us:https://wa.link/q3kmv5

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*****If you want to know about the steps to be taken before initiating debt recovery action, you can read our article.

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*****About frequently asked question for debt recovery action, you can read our article.

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*****What will be the legal consequence if one ignoring the letter of demand issued to him, you can understand it by reading our article.

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You can learn other legal information from our website:https://www.yeolaw.my/

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