Make clear agreements
Before you lend money, it is crucial to make clear and written agreements. Define important details such as the amount and interest rate. This provides clarity and minimizes the risk of misunderstandings.
Contractual security
A solid loan agreement is the backbone of any financial transaction. This document lays out the agreements between you and your acquaintance in clear and binding terms. Here are some important elements that should be included in the loan agreement:
Amount and Interest Rate: define the amount borrowed and the interest rate (if applicable) you agree to pay on the loan. Make sure the interest rate is reasonable and in line with current market standards.
Repayment terms: specify the timing and method of repayment. This may include a lump sum payment or installment payments.
Term of the loan: define the time period in which the loan must be repaid. Clarity regarding the time frame prevents misunderstandings.
Signing the contract: Make sure the contract is signed by both parties. This reaffirms agreement to the terms set forth.
Repayment clause: include a clause that addresses how missed payments or delays will be handled. This ensures that a clear plan is in place in the event of difficulties.
Consider tax implications
If you lend money to an acquaintance and receive interest on it, that interest income must be declared as part of your tax return. You must also list the loan granted in the securities register. It does not matter whether the loan is interest-bearing or interest-free. In return, your acquaintance can declare the loan as a debt in the list of debts and thus deduct it from the taxes.
