Loans between friends or family members should be secured
Loans between friends or family should only be granted on a written contract. Both sides benefit from a corresponding step, since the document provides a binding framework and thus security for borrowers and lenders.
Driven by altruistic motifs, however, a contract is often dispensed with. The lender wants to help a family member or friend and not do business. The borrower is so grateful for the loan that he usually doesn’t even think about a contract. But friendship stops when it comes to money. Countless personal relationships break through such a loan. This could often have been avoided with a written contract. But there are other reasons that speak for a formal approach.
Credit preparation: Did both sides really think of everything?
The legal situation for loans without a written contract is simple: the verbal agreement applies. Since there are no written rules, the provisions of the German Civil Code apply. Neither side cares. How critical this can be can be seen in the loan preparation.
For example, the term of a private loan is often a crucial sticking point and indicates that the borrower should have preferred to go to a bank. For example, a personal loan from Lite Bank can be repaid over 84 months. Friends often cannot and do not want to wait these 7 years.
If there is no written contract, the BGB allows the loan to be terminated at any time with only three months’ notice. In theory, the lender can only request their loan back three months after the payment, regardless of what has been agreed verbally. Protection only offers a written agreement.
Interest can become a significant problem for both parties without a written contract
Interest becomes a significant problem for both sides for three reasons if there is no written agreement:
- A statement can quickly stand against a statement
- There must be an agreement for tax reasons
- The appearance of a hidden gift is avoided
Avoid statement against statement
Private loans are mostly granted without interest or with a low interest rate. However, it can quickly happen that a statement stands against a statement, for example if the lender claims that it has been agreed that interest will be charged after a year or that the interest rate will rise.
The borrower can testify that after a certain period of time the interest should cease to apply or be reduced. The uncertainty is enormous for both parties.
Taxes: In case of doubt, the tax office would like to see a contract
Private loans are often given as investment aids. The borrower should, for example, become self-employed. Agreements are common that the debtor only has to pay interest if he writes in the black. However, the debtor may actually write off this interest as advertising costs. However, this is only possible if there is a contract that regulates the amount of the interest. Only then will the tax office accept the interest as a corresponding depreciation.
On the creditor side, the following applies: The interest is taxable profit. In principle, you will be subject to a flat tax of 25 percent. However, the lender can place an exemption order or insist that the interest be added to his personal income. In both cases, the tax office requires a contract to approve the application.
Furthermore, the contract guarantees that there is no suspicion of avoiding taxes. If the debtor transfers the installments to the creditor’s account, it is not clear what is the repayment and what is the interest rate. It is strongly recommended that the debtor always note this in the purpose. Banks always break this down for direct debits.
Avoid the appearance of a hidden gift
Tax authorities are very skeptical, especially when it comes to loans among family members, whether it is really a loan and not actually a gift. There is suspicion that the gift tax should be avoided. Corresponding fears can already be triggered by actions that are actually well-intentioned.
For example, “pay the money back whenever you can” is a common loan agreement between people who are close. Tax offices tend to assume that the donation will be made.
A contract prevents this because it sets a clear repayment date or at least contains corresponding regulations for flexible repayment. For this reason, loans with no interest between friends or family members should also be secured through a written contract!