Home Money & Finance Will It Be Legal to Borrow Money from Friends and Pay Them Back an Interest

Will It Be Legal to Borrow Money from Friends and Pay Them Back an Interest

by Olufisayo
Borrow Money

There’s nothing new when one decides to borrow money online or from other platforms. The issue of legality depends on various factors. Will it be legal to borrow money from friends and pay them back an interest? It depends! On what? You may ask. Lenders and borrowers live in different jurisdictions.

Each of these states has their own laws governing borrowing. This includes borrowing from friends and family. Let’s dive deeper into the details of what determines whether borrowing from family is legal or not.

Jurisdiction

The law reigns supreme everywhere in the world. These laws govern every undertaking in the concerned state. When it comes to money lending to friends and family, you are allowed to charge interest on money lent. Although you should keep in mind there is a cap which you cannot exceed. The interest limit varies depending on your state of residence.

Formality

When you decide to lend or borrow from family or friends, you decide whether the agreement will be verbal or written. It all depends on your relationship and the trust existing between parties coming to terms.

A verbal agreement involves little as far as the law is concerned. The reverse is valid for a written agreement. A signed contract consists of the law. If it is written and contains some wordings and terms, then be sure the law will be involved.

For written agreements, the law of the state guides which interest rate is legal or illegal. Going against these guidelines will land you in trouble. A penalty, fine, or both will be the consequence.

Personal Relationship

Your relationship with the lender or borrower can shape the deal’s legality. How? You may wonder. Well, it’s all about trust.

If you trust the borrowing friend or relative, you will be free to give them money without opting to do a written agreement. Because there is a guarantee they will abide by the verbal agreement. This does not attract legality issues.

On the other hand, if you do not trust the other party, then you may choose to risk your money; although you may do a written agreement to cushion yourself from default. Once it goes down on paper, it must and will attract the law’s interference.

At that point, the interest you will choose to charge your borrower will be affected by the law’s stipulation. Charging more than the law allows will attract repercussions.

Things to do to avoid illegal borrowing and lending of money to friends and family

  1. Mind the interest rate

Different states give different interest rate caps. It would be wise if you did your homework well on which interest rate is allowable in your state of residence. Once you are aware of that, ensure you do not go beyond the capped rate.

Why is this important? It will assist you in avoiding trouble with the law agencies.

  1. Consult

It never harms to seek second, third, and even fourth opinion. Doing consultations with the law and financial experts will do you good. It is not a must you look for professionals to hire.

Perhaps you have a relative or family member who has experience in financial and legal matters. Why not consult with them? The best decisions come out of consultations.

  1. Maintain a good relationship with your lender

Being trustworthy is the easiest way to secure loans quickly. A good relationship will save you the stress of being charged with high interests because you are a high-risk borrower.

Maintaining a healthy relationship will also shield you from many formalities that give birth to legality issues. How so? If you are untrustworthy, your lender will be forced to do a written agreement with you. Such contracts attract interests from law agencies and financial sector regulations. To escape all that, better build an excellent relationship with your borrower.

  1. Avoid written agreements

Is this unethical? Not really! There’s a significant distinction between evasion and avoidance. While evasion is illegal, avoidance is allowable by law.

The law has provisions to make citizens lay off the burden of some of the regulations in place. These allowances give room for people to carry less weight from taxes to other loads.

When it comes to loans from families and friends, the same applies. You have the allowance to avoid written agreements. Verbal agreements do not submit to the state laws. Therefore, whether the interest rate on the loan is high or low, the law does not apply.

Although, with this recommendation, be careful. It may work against the borrower or the lender. The lender may apply abnormal rates to the borrower. On the other hand, the borrower might choose to default. Therefore, both parties should be cautious not to get to that point.

  1. 5. Transact lesser amounts

When you go to the bank, some values are so little that the regulator doesn’t get concerned. Things will change when the value transacted rises to a certain amount. Bank regulations come to play instantly.

Borrowing follows the same path. Transacting little amounts is okay. The question of legality comes to play when the amount rises to a certain level. It starts to attract the regulator’s attention. Borrow fewer amounts to be on the safe side of the law and to avoid the regulator’s attention.

  1. Only apply interest when necessary

Interest rates on loans given to friends and family are illegal in some states. In others, it’s not, while other states allow interest rates depending on the circumstances. Therefore, it is only wise to charge interest if it is indispensable. If not, don’t. It is safe that way. You will save yourself from unnecessary legal processes that may arise because you decided to put an interest on a loan.

CONCLUSION

Borrowing money from a friend or relative is allowable in some states but illegal in others. Therefore, before opting to borrow with interest, find out whether your state allows or not. If it is not allowable, borrow money online and check out https://www.bestmoneylender.sg . Stay out of trouble.

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1 comment

Citi Diamond Preferred December 16, 2019 - 8:00 PM

Thanks for the informative article. I’m not a fan of borrowing money from friends or relatives, regardless of what the law says. I believe that this is not right, even though it is more profitable than taking a loan from a bank. Yes, sure in this case there is no interest rate. But in my understanding, there are special instances where this is done legally. Friends and relatives are not for borrowing money. They are for another purposes;) This is my personal subjective opinion.

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