Do you want to help a loved one by lending them money? Find out about all the risks that this choice may entail as well as the measures to take to protect yourself. We explain how to write an IOU.
What is a private loan?
We speak of a private loan when an individual borrows a sum of money from another individual. But also to a business. Indeed, it is not uncommon for an individual to lend money to another individual in case of need. Get credit when you have a lawsuit is for example not always possible depending on the situation.
This kind of case, which is frequent, is an excellent way to bypass traditional bank financing. Indeed, lending money between individuals often generates less interest. In addition, it is possible to simplify the reimbursement procedure. It should also be noted that some companies prefer to borrow money from an individual. Indeed, because companies do not always meet the conditions required to be able to get a bank loan.
Why protect yourself when making a private loan?
In most cases, a private loan, the agreement between the debtor and the creditor is done orally. This is a frequent case since a private loan is generally made between relatives. But also between spouses or between people of the same family. Individual lenders tend to neglect the precautions for this kind of agreement. Yet a loan is still a loan and always presents a risk of default.
Don't lose money!
Indeed, by lending money, even to a relative, you are not immune to late payments. These delays may be prolonged and repeated. In the worst case, your creditor may simply repudiate his debt. He can also pretend it was a gift from you, and you'll lose your money for good. In this kind of case, if you decide to file a complaint, you will be engaged in a costly and long legal procedure, for lack of tangible proof.
To avoid this kind of problem, you should write a contract called "IOU". This is the document that will justify the loan. If the latter is made between spouses without this deed, the loan will be considered as a donation in the event of divorce or death of the lessor.
Writing an acknowledgment of debt will therefore allow you to enforce your right to reimbursement in the event of a problem. This document will also facilitate any legal proceedings if the borrower decides to no longer reimburse you. Also be aware that an IOU can allow you to obtain credit with debts. You will find more explanation in the following article « How to obtain a credit with lawsuits in Switzerland?“.
What does the law say about private lending?
There are two articles of law concerning the recognition of debt. Section 82 LP refers specifically to the Federal Debt Collection and Bankruptcy Act. It is stipulated by this article that if a debtor sues his creditor in court and that the prosecution is based on a letter of acknowledgment of authentic debt (having therefore been noted by deed of authenticity or under private signature), the creditor may request the provisional release of the opposition.
Swiss Code of Obligations Concerning Consumer Lending (on page 220, Chapter II, Articles 312 to 318).
What does not constitute an acknowledgment of debt?
In the event that a relative borrows money from you to acquire a consumer good, for example furniture or a car, the law would not consider a simple invoice in your possession as an acknowledgment of debt (therefore proof that the money came from you). In addition, it should also be noted that before the court of justice, an email or an SMS exchanged by the creditor and the debtor cannot constitute proof of the loan.
How to properly write an IOU?
To properly write an IOU, you must take into account that this kind of agreement between lender and borrower must always be in writing. As a lender, you must ensure that the borrower's commitment to pay is not subject to any conditions or to possible reservations.
Mandatory points when drafting an IOU
In a reconnaissance, we must be able to read:
- The first and last names of both parties. In particular the debtor and the creditor;
- The amount of money that constitutes the loan. This must be written in figures, then in letters;
- The maturity of the loan and any agreed monthly repayments;
- A handwritten and clearly legible signature of both parties
When drafting, make sure that all the sums (sum of the loan, sum of each payment by maturity, sum of interest if there is any) are clear so that the judge does not engage in any hazardous calculation in the event of a dispute. Otherwise, your possible release request may be rejected if your recognition does not clearly contain the usual key elements. Note that you will only be able to prosecute if the due date of the loan or the repayment due has passed.
For this contract to be legal, both parties must be of legal age and in full possession of their abilities. Thus, neither party must have physical or mental problems.
If the creditor is a legal person, you must check with the commercial register that the signatory does indeed represent the company officially.
What is the limitation period for this contract?
Generally speaking, the statutory limitation period is 10 years. However, if the private loan is between spouses, the deadline is fixed during the period when the two parties are married. The counter therefore begins to run only after a possible divorce.
If you have any doubts about drafting your IOU, ask your partner Lica and one of our specialists will help you. We can also send you a standard document to save you time. If someone you know wants to borrow an amount, tell them about Lica and our terms which are the most interesting on the market to date! For any financing request, click on the following link: Make my request with Lica.