Few things to be kept in mind before lending money to anyone

The concept of money lending and borrowing is not a new concept for the people in India and in fact the practice of lending and borrowing money has been prevalent in India from times immemorial.

It is quite common and a deep-rooted practice. Money Lending is nothing but the practice of advancing loans either secured or unsecured at a specified rate of interest for a limited amount of time.

Spasmodically people in India prefer borrowing or lending money from a known source instead of advancing loans from financial institutions.

The system of lending and borrowing money was devised in ancient Greece and Rome approximately 3000 years ago!

It is quite a lucrative way to earn money and many applications online on the internet have started providing this facility where people can borrow money from them.

Lending money to friends and family is not considered illegal in the eyes of law but if done professionally without fulfilling the pre-requisites of the same can attract some legal problems for a person.

As we all know that finance is the lifeblood of all the organizations and it is of paramount importance to have a good flow of finance to run an organization.

But once in a while, a person due to some unforeseen circumstances or misfortune has to face a cash crunch. These unprecedented times are a perfect example of a lot of people facing a cash crunch.

I do not intend to be monotonous and lets straight away come to the things that should be kept in mind before lending money to anyone.

1. Always keep in mind before advancing or lending an amount whether small or big you shall have the proof of transaction.

2. It is advisable to avoid lending money in cash and resort to online bank transfer or NEFT or even a cheque.

3. Always insist on a written agreement or a promissory note. Mention the loan amount, tenure of the loan, conditions of repayment of such loan, interest, etc. Always get the loan agreement notarized.

4. Understand the need or the purpose of the person borrowing money from you.

5. Before lending or advancing money to the borrower check if the person or organization is capable enough to repay the amount being borrowed.

6. If you choose to opt for a promissory note or agreement after obtaining the signature of the borrower do not forget to get the thumb imprint of the borrower as well.

7. Never lend the money without any witnesses to the transaction. If the loan is being advanced in cash always have two or more independent witnesses while lending money to the borrower.

8. If as a security a post. dated cheque or a blank cheque is being issued to you then mention it in the agreement along with the cheque number.

9. If possible attest photos of the borrower and lender in the loan agreement.

10. The moneylender should always maintain a clear record of the transactions for the sake of brevity.

Every state in India has different money lending laws. In Madhya Pradesh, the Law that governs money lending is The Madhya Pradesh MoneyLenders Act, 1934.

If a person's business is lending money to others then he or she shall obtain a license under the provisions of The Madhya Pradesh MoneyLenders Act, 1934. This is a condition precedent to be followed for the inhabitants of Madhya Pradesh as it is only applicable to the State of Madhya Pradesh.

It is always recommended to obtain a thumb impression of the borrower on the loan agreement or the promissory note as a signature can be different, can sometimes mismatch, a person might change his or her signature, or the signature might even be forged whereas the thumb impression can not mismatch or can not be changed.

If a person wishes to obtain a license for lending money from the authorities he or she shall move an application for the same before a concerned tehsildar and after approval, the license is issued and is valid for one year and is renewable at the option of the person in whose name the license was issued.

The authorities before issuing a license check for the following things:

1. If the person is genuine or not.

2. place of business is appropriate or not.

3. If issuing a license in favour of the applicant is against the public interest.

Why is a loan agreement required?

A loan agreement is required in order to determine the terms and conditions between the lender and the borrower.

The agreement is binding on both the parties. It is a significant step as all the rights and liabilities of the parties are stated clearly and thus avoids future legal trouble and confusion.

The main purpose of a loan agreement is to serve as written evidence of the amount being advanced to the borrower, on such terms under which the loan money shall be repaid - including the rate of interest involved. It is a legal document having a legal object and is enforceable in the Court of law. 

What are the Remedies available to a money lender in case the borrower defaults or the loan goes bad?

In case, a loan goes bad and the borrower fails to pay the amount borrowed then the moneylender can file a civil suit for recovery of money before the appropriate court of law to recover the amount advanced.

Conclusion

Money lending business is quite common in India and people some times do not take these things seriously which might be fatal for them. With the help of this article, I intend to throw some light upon the due diligence that shall be done by the moneylender.

This article is purely for educational purposes and shall not be misconstrued as a piece of professional advice. If done so the people at The Legal Cartel along with the author shall not be responsible for any loss or harm incurred whatsoever.

About the author:

The author is an advocate practicing before the Hon'ble High Court of Madhya Pradesh Bench at Indore and the Lower Courts below. For further clarification, kindly consult the author.