Is it pouring money? Beware not to erase the loan agreement.
Updated: Nov 24, 2023
”I pledge to repay it within 2 months!”, ”Uh, I lack the funds this month”, ”Look at the predicament I'm in! I'm short of cash...”. Should you wish to avoid being part of such a dialogue, it is imperative to earnestly contemplate the execution of a loan agreement between private individuals when extending financial assistance to friends or relatives.
In our daily lives, we might face situations requiring a temporary financial infusion to contend with unforeseen circumstances or to facilitate the achievement of specific objectives. Naturally, we seek to provide assistance to our relatives and friends in similar circumstances.
A loan agreement between private individuals often proves to be the most accessible recourse in such instances, free from the formalities associated with conventional banking institutions, credit risk assessments, and exorbitant interest rates. However, to safeguard the interests of all parties involved without engendering future disputes and discord, the agreement should be formally documented.
Let us delve into the reasons why a loan agreement is imperative and the considerations that demand prudence.
1. In law, what is not proven, does not exist.
The legal framework reads that transactions exceeding a value of 250 lei may solely be proved through written documentation. We are not talking about daily life, where the existence of a loan agreement can be established by various means, but rather to the procedural rules that government authorities must adhere to when confronted with such matters.
Let’s consider this scenario: you extend a loan of 3,000 lei to a friend. There were other witnesses present who observed your conversations and witnessed the cash transfer of the borrowed funds. These witnesses can vouch for the veracity of events to other friends or help remind the borrower of the established terms.
However, should the borrower fail to return the funds by the agreed-upon due date, recourse to state authorities becomes necessary for recovery. In such a situation, either a judge or a bailiff will become involved. Unlike relatives, state authorities are precluded from considering witness testimonies, as the prescribed monetary threshold is exceeded. In the absence of a written document, the authorities can only conclude that no loan contract existed, rendering them unable to facilitate the recuperation of funds.
It results that the monetary threshold rule mandates the formal written documentation of a loan agreement between private individuals whenever the transaction value exceeds 250 lei.
Otherwise, the lender who extends the funds, faces potential complications, as they are precluded from recovering the sum via state authorities.
2. Do not rely on exceptions
In certain scenarios, the threshold rule does not apply, allowing the proof of a loan agreement between private individuals without written documentation, even when the transaction value surpasses 250 lei. These exceptions encompass circumstances when:
there is a material or moral barrier to executing a written document (for example, if the relationship between parties is exceptionally close).
some written evidence exists (for instance, if the friend who borrowed money has manually drafted portions of the loan contract but has not applied a final signature).
a written contract has previously existed but has become unavailable due to circumstances beyond one's control, such as force majeure (e.g., the contract was destroyed in a fire that affected the premises where it was kept).
parties explicitly, or tacitly, opt to employ such evidence (for example, if the borrower does not contest witness testimonies attesting to the loan).
the contract is invalid due to specific, extraordinary circumstances (fraud, error, deception, coercion, or nullity on account of illicit or immoral causation). This arises, for instance, when funds are extended under coercion.
To benefit from exceptional circumstances, a valid exception should genuinely exist. Relying on such exceptions when deciding whether to commit a loan agreement between private individuals to written form is inadvisable, as the ultimate determination rests with a judge. The judge's ruling is ultimately contingent upon the evidence presented.
3. Choose the right contractual clauses.
As any other contract, a loan agreement between individuals is sufficiently important to require the employment of a professionally crafted template when formalizing it. Access to such template for loan agreement is readily available at exceptionally modest costs on our website. It is less costly to rpevent then remedy an unfortunate situation.
Getting back to the clauses of a loan agreement, sonsider the following aspects:
Set a repayment deadline. Specify when the borrowed sum (or other assets) must be returned. The timeline may be stipulated as a fixed date (e.g., December 1, 2024) or as a formula (e.g., three months from the signing of this contract). Failure to stipulate a repayment timeline may necessitate judicial intervention to establish one.
Set an interest rate. An interest rate may be established to remunerate the lender for lending funds, akin to the practices of financial institutions. This rate represents the cost incurred for foregoing the use of the funds over a defined period. Another type of interest rate may apply if the borrower fails to repay the funds as per the agreed-upon due date, serving as a penalty for non-compliance with the terms of the loan agreement. Absent a predetermined interest rate, the law provides for specific rates through Government Ordinance no. 13/2011. The first interest rate category (remunerative) is determined at the level of the National Bank of Romania's reference interest rate, while the second interes rate category (penalty interest rate) is established at the reference interest rate plus 4 percentage points.
Consider any special clauses. Within the loan contract, you can include details specific to your situation, such as clauses that constrain the borrower to use the money for a specific purpose, or confidentiality clauses, or innovative mechanisms for repayment. Most loan contracts between private individuals do not care for the manner in which the funds will be employed, primarily due to the familiarity of the parties involved. However, in certain contexts, such clauses can prove advantageous - for example, when providing assistance to a friend in initiating a business venture, you wouldn’t like them to acquire the new iPhone model instead. Legal consultation with a specialized attorney is recommended for those clauses requiring comprehensive guidance.
4. Tips for loan contracts amongst friends or relatives
The above information serves to protect your financial interests from a legal standpoint. Nevertheless, it is equally essential to safeguard the interpersonal relationship with the borrower, especially given their likely significance in your life. The following recommendations should be taken into account:
Have an open communication. Prior to formalizing the loan agreement, engage in candid and honest dialogue regarding the anticipated course of events. Ensure mutual agreement with the specified terms.
Anticipate possible scenarios. Foremost, contemplate potential outcomes if the borrower is unable to fulfill the repayment obligations by the predetermined due date, whether in full or in part. Legal provisions offer diverse remedies, permitting flexible resolutions or, conversely, resorting to more aggressive ones. Engage the borrower in such discussions from the outset to ensure both parties’ awareness of potential consequences.
Establish boundaries. While some may choose to prioritize friendship over money after reppeatedly asking back for loans without results, for others it is a sensitive subject. Carefully evaluate the decision to give up your money and ask yourself if what you prioritize is valuable enough.
In conclusion, loan agreements between private individuals are not just a financial transaction. View them as a commitment that comes with responsibilities. Make sure you comprehensively understand the mechanics of the loan agreement before proceeding to enter into one, and remember that a written document can help you foster a healthy relationship with the borrower.
We wish you good luck!
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