Friendly Loan & Must-know Tips Before Lending Money

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Due to the current economical and financial uncertainties in our country, it is getting more common to hear friends and family members asking for “friendly loans”, to afford their living expenses, housing or car repayment, any kind of debts and others.

Before venturing into the decision whether to lend a hand or fold your arms, first question that comes to your mind should be:

What is a friendly loan?

To make it simple, a friendly loan is a lending of money between two persons based on mutual trust, as opposed to the normal borrowing from a financial institution or licensed moneylender. In common practice, friendly loan is often informal and might not have a written agreement between the lender and borrower. However, the absence of such formality does not invalidate it as a legal and financial agreement.

Are Friendly Loan Agreements legal?

Yes, friendly loan agreements are legal in Malaysia. It is a misconception that granting a friendly loan and charging interest on the loan would render it to be an act of illegal money lending. In fact, the law recognizes a friendly loan contract as a valid contractual agreement between the lender and the borrower, and as such it is enforceable in law. The law even allows the lender to charge reasonable interest on the loan against the borrower.

Where the trouble might come in!

The whole case may change if the court or authorities find out that the lender has been lending money to multiple individuals, earning cash by charging exorbitant interest, or operating the money lending activities like a business world. The reason is simple because the law expressly states that only businesses and individuals appropriately registered under the Moneylenders Act 1951 can carry out moneylending as a business. Without the registration under the Act or any regulated license, the lender is considered as the so-called “loan shark”.

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What happens if a friendly loan is considered as illegal money lending?

First, in any event that a friendly loan is considered as an illegal money lending, the lender will be deemed to have committed an offence for carrying out an unlicensed money lending business under the Moneylenders Act 1951.

Section 5(2) of the Moneylenders Act 1951:

Any person who carries on or advertises or announces himself or holds himself out in any way as carrying on the business of moneylending without a valid licence, or who continues to carry on such business after his licence has expired or been suspended or revoked shall be guilty of an offence under this Act and shall be liable to a fine of not less than two hundred and fifty thousand ringgit but not more than one million ringgit or to imprisonment for a term not exceeding five years or to both, and in the case of a second or subsequent offence shall also be liable to whipping in addition to such punishment.

Secondly, the friendly loan agreement shall be deemed void by virtue of Section 24 of the Contracts Act 1950 where the considerations and objects are unlawful in law. However, this does not mean that the borrower does not need to repay the loaned sum! Section 66 of the Contracts Act 1950 states that when an agreement is discovered to be void, any person who has received any advantage must restore it or make compensation for it. Therefore, despite that the terms in the friendly loan agreement (such as interest chargeable, securities etc) will become void and unenforceable, but the borrower remains liable to return the loaned money.

Must-know Tips Before Lending Money

If you decide to lend your hand to your friend or family member who is in hardship, you might want to know and learn some must-knows tips before transferring money to his bank account. All the tips advised here are to protect your own interest and to avoid being recognized as a “loan shark” so that you will not be caught in any trouble.

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1. Sign a Friendly Loan Agreement and document the friendly loan

Some people might be thinking that they trust their friend or family member that they will repay the loaned money as promised, so it makes them feel reluctant to put such money lending in writing for fear of “offending” the borrowers, or fear of affecting their relationships. Due to the nature of a friendly loan (which is commonly made in an informal way such as by conversation or texting, so there will no no written terms and conditions like a normal contract), so it will be difficult to establish and prove your case in court when the matter goes bad.

But we understand, friend is friend, family is family but money is money!

First best step to do, you may get a lawyer to draft you a Friendly Loan Agreement, or DIY a promissory note that outlining the basic details as follows:

a. the amount of debt;
b. interest chargeable (if any); and
c. date of repayment and/or repayment schedule

Informal correspondence such as emails and texts to communicate and agree the loan and repayment terms, bank in slips or transaction proof should also be documented and stored properly to be used as evidence in future legal proceedings.

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2. Do not charge exorbitant interest rate on friendly loan

As mentioned above, charging unreasonably high interest rate on friendly loan may seek attention of the authorities. Do remember the court allows the lender to charge a “justifiable and reasonable interest rate” so long as it is not exorbitant, excessive and unconscionable against the borrower in a friendly loan.

But what does it mean “reasonable simple interest rate”?

In practice, the court views a reasonable simple interest rate as to the interest rate close to what banks normally charge and impose. As held in the case of Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd [2017] MLJU 526 (HC), the Court struck out the term of imposing interest rate of 8.8% per annum, and instead applied a simply interest rate of 5% per annum.

3. Have a clear repayment term

Having a clear repayment term being stated in the agreement is extremely significant for the purpose of recovering the loan which may be defaulted by the borrower in the future. Under the law, the limitation period for a debt recovery is 6 years from the date of repayment. In simple words, a lender has 6 years to initiate a legal action against his defaulted borrower from the date of repayment. It must be noted that the expiry of limitation period will bar and prohibit the lender from commencing any legal action against the borrower.

However, in the absence of a proper term of repayment being stated or agreed upon, as held in the case of Kam Seng Realty Sdn Bhd v Dato Tai Fatt Yew & Anor [2012] 7 MLJ 825 (HC), the limitation period of 6 years begins to run from the date the loan is given.

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4. Secure the loan with securities

Every professional lawyer will tell you this if you ask for methods as precaution to protect yourself as to recover the debt from your defaulted borrower. We have seen that sometimes borrower is being uncooperative, or he simply has no money to repay the loan. Therefore, it is advised that you, as a lender could request the borrower for securities as follows:-

Appoint a reliable third party as the borrower’s guarantor
The easiest and most straightforward method is to request the borrower to appoint a third party (an individual or a company) to act as his personal guarantor. In any event that the borrower fails to repay the loan, the lender is entitled to sue both the borrower and guarantor to recover the loan. Of course, as a lender, you will want to make sure that the appointed guarantor is financially stable and reliable so that it is more likely that he is able to be responsible for the borrower’s loan upon any default.

Securing with lands and shares
With lawyer’s assistance, a lender may request the lawyer to draft and insert the related terms and conditions for securities in the Friendly Loan Agreement. For lands, the lender may request the original land title from the borrower so that he could lodge a “Lien-Holder’s Caveat” on the land. Upon default of payment, the lender may sue and apply for an order for sale of that land to recover the loan. Similarly for shares in the company, supplementary document such as share charge agreement may also be signed by both parties in order to create security over the shares. Together with the Friendly Loan Agreement, upon default, the lender is entitled to the shares absolutely, or to sell the shares for recovery of the loan.


We, as lawyers, have seen too many cases where the lenders were unable to recover the loaned money simply because they did not have any documental proof of the friendly loan provided. Being valid and enforceable in law, it is necessary for the public to understand that a Friendly Loan Agreement and its documentation are important to ensure the security and protection of the parties’ interest. Besides, it also should be drafted and prepared carefully to avoid any breach or non-compliance with the Moneylenders Act 1951.

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The information published in this article is provided for general informational purposes only and does not constitute any legal advice from Messrs. Yee & Partners. Feel free to seek legal advice from our professional lawyers.