The risk of lending money to relatives and friends

There is much wisdom in the phrase “neither a borrower nor a lender be”, especially when it comes to giving loans to relatives and friends because relationships will sour if the loan is unpaid.

You should always think twice about lending money to those with financial woes unless you are willing to forgo the sums just to help them.

Forget about making money on the side by charging an interest because the Moneylenders Act will bar you from recovering your money if you are running a loan business without a licence.

While the law does not bar you from charging interest for a loan to a friend, a person would be deemed to be operating an illegal moneylending business if he or she is “ready and willing to lend to all and sundry” and not just to friends or relatives.

Here are two cases involving lenders who faced problems in getting back their money from borrowers.

Loan or investment?

A man tried to get his borrower to honour a $2 million IOU note, but he ended up being accused of being a loan shark because the original loan was just a fraction of that amount.

The borrower said he wanted the money for investment and even promised the lender some returns. But he claimed that he took only about $66,000 and this sum had ballooned to $2 million due to the high interest rate and penalties for late payment.

He admitted to writing and signing the IOU note but said he did so under threat because the lender came to his home with a group of men.

But the lender claimed he was suing to recover the money he had invested in the borrower’s scheme that could reap a high return on a monthly basis.

But he could not provide any details of this investment agreement, which was supposedly made orally. He also did not disclose the sum of his original investment and how this sum became $2 million.

Not surprisingly, the High Court found it incredible that the lender could not provide details of his alleged investment when such a big sum was involved.

It was also strange that the lender had no idea how the money was being used for the investment.

So the case was dismissed, not because the borrower did not take any money but because the lender’s suit was a “non-existent cause of action backed by no evidence”.

Loan was not put in writing

A licensed moneylender thought it would be safe to lend $4 million to a company because he could make a hefty return of 15 per cent, or $600,000, within a short time.

In his haste to provide the loan that was requested on an urgent basis, he skipped an important step – putting everything in writing – which later proved costly.

The company later reneged on the deal and said it had no obligation to return any cash to him because it was supposedly used to pay a debt.

The moneylender cried foul and sued the firm, maintaining there was a loan arrangement that would enable him to reap the 15 per cent return.

While his bank statements showed the $4 million had been transferred from his bank account, his lawsuit failed because he could not produce any document to show that the company had borrowed the funds from him.

He could not convince the court there was a loan arrangement because previous loans to other firms had been documented in formal agreements. These agreements were drafted by his lawyers and stated how the debts could even be paid with company shares if they were unable to pay with cash.

The court noted that even if the moneylender had wanted to provide the loan quickly, he could have at least copied his previous agreement and made his borrower sign it.

The absence of documents made it hard for the experienced businessman to explain why he was willing to give such a large sum away without recording the deal in writing.

So there are risks aplenty when it comes to giving out loans because as these cases show, borrowers can simply deny the debt and this will result in more expenses to try to recover the loan.

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.

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