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Loan Agreement

People usually take loans from friends or family members or colleagues for various purposes. Especially when faced with some critical financial situations in life like a wedding in the family or starting a business or construction of house or even some urgent hospitalization etc many of us turn towards friends or relatives for financial loans rather than depending on Banks or private financiers.

A loan given to a friend or family member is like aiming an arrow into the dark, it may or may not be repaid. Also, it does not attract interest and hence the lender in all cases tend to become losers of the loan money. And with it the relationship also fails.

Hence, it is always advised to make the process of loan legally valid and in writing. By this it is possible to secure your money and also help your friend or relative.

You can either make a promissory note or a loan agreement for this purpose.

What Is A Promissory Note?

If you want to make a simple written proof of your loan then a Promissory note would be fine. You can just mention the loan amount and some simple clauses and the date of repayment etc.

A Promissory note is a negotiable instrument that comes under Section 4 of the Negotiable Instruments Act, 1881. It is an acknowledgement and unconditional promise by the Borrower to pay a fixed sum of money to the Lender on a fixed date or on demand. There are different kinds of Promissory note like single borrower, joint borrowers, bearing interest, interest free, repayment in lumpsum, repayment in installments.

A Promissory note needs to be printed on a Stamp paper and should be sealed and signed by a Notary Public. A Promissory note cannot be amended or modified.

What Is A Loan Agreement?

Another way of making your loan legally valid and secure is by making a loan agreement. A loan agreement is more elaborate than the promissory note and you can include as many clauses and terms and conditions as you feel required. You can also include some specific and detailed details of the loan like default, penalty, legal heirs, termination, collateral, security etc.

A loan agreement can always be modified or amended.

What Should Be Included In A Loan Agreement?

Since a loan agreement is a very important document in proof of your loan details, you need to be very careful in selecting what clauses you need to include in it. Some of the most important details that you need to include in the loan agreement are mentioned below:

  1. Always write the full name of the person who lends the money, commonly called as the “LENDER” as appearing in any of the ID proof documents like PAN card, Passport, Driving Licence etc of the Lender
  2. Give the full name of the person who is borrowing the money commonly called as the “BORROWER” as appearing in any of the ID proof documents like PAN card, voter’s ID or Passport etc. of the Borrower.
  3. Give the age, father’s name and residential address of the Lender and Borrower.
  4. Mention the relationship between the Lender and Borrower.
  5. Write the amount of loan that has been lent to the Borrower.
  6. Mention the purpose of the loan like conducting wedding, hospital charges, investing in a business or any other purposes.
  7. Give the duration or tenure of the loan and the termination date.
  8. Explain the repayment options like whether it is by lumpsum payment or by installments. If installments, mention the amount of every installment and the number of installments.
  9. Mention the rate of interest charged on the loan amount and whether the interest is calculated as Simple interest or Compound interest.
  10. Give a strong penalty clause and explain in detail as to what is the penalty to be paid by the lender in case of default in the repayment of loan.
  11. Finally always mention the jurisdiction of the Court under which any dispute regarding the agreement shall apply.
  12. Also you can include the Arbitration clause which helps you in settling any dispute with the help of an Arbitrator without going to Courts.
  13. Both the Lender and the Borrower have to sign the agreement in the presence of two witnesses.
  14. The loan agreement has to be printed on a Stamp paper of due value.
  15. The agreement has to be attested by a Notary.

What happens if you give or take loans without an agreement in writing?

A friend or family may be important to you. But even more important is the protection of your financial interest in life. you cannot give away lumpsum and huge amounts of hard earned money to any friend or family member just like that without any legal papers in writing as proof of such transactions.

Any loan that is given to any person without a written proof shall result in such difficulties to the Lender:

  1. In case the Borrower is not able to repay the amount due to any reasons, the lender is not in a position to get back the money since there is no written valid document to show the proof of such loan taken or given. Hence, the Lender will have no other option but to lose the money given as loan.
  2. Relationships can get strained because of money issues like this and hence bitterness and vengeance can be the result. It may even lead to murders and violent attacks on the other by either parties.
  3. A false case can be filed against the other by either parties using any fake signature or documents. This can result in unnecessary loss of time and money in conducting case and proving the innocence.

Benefits Of Making A Loan Agreement In Writing

An intelligent person is always the one who makes any financial transactions legally valid by putting it in writing. The essential benefits of making such agreements among family members or friends are mentioned below:

  1. In case the Borrower is not able to repay the loan amount, the Lender can always take the written agreement to the Court as proof of the transaction and claim the repayment to be done by the Borrower.
  2. If there is any dispute regarding the amount to be repaid or rate of interest or the time limit for repayment etc. the agreement stands as a strong proof to exactly know the actual values of these.
  3. No fraud can be committed by either parties and the possibility of such frauds are minute.
  4. The signatures of both parties are clearly evident in the document and hence forging signatures and making fake agreements is definitely impossible.

Can A Loan Agreement Be Modified?

A loan agreement can always be modified or altered to either include any new terms and conditions or to delete any terms and conditions. The modifications should be done by the mutual consent of both the parties and should be drafted on a separate document and signed and attested by a Notary. Two witnesses also need to sign the amendments.

Are Loans Within Family Members Taxable?

Loans within family members are not taxable under the Tax laws of India. Any loan given to a family member cannot be taxed. Hence, if you are lending money to your near and dear ones, then don’t worry the Tax Department will not come to your doors.

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