The car repair needs to be paid for, the roof is leaking or the heating is on strike? Almost everyone comes once in the situation, in which the account is empty and the banks are not cooperative. When one's own credit rating is just as insufficient as the collateral available, credit institutions are usually ruled out as problem solvers. That leaves only the inner circle of friends, acquaintances and relatives. What you should consider when borrowing money in a private environment or lending money yourself, you will learn here.
Lending money among friends or family is widespread. Because it is a simple alternative to the cumbersome process of applying for a loan from a professional credit institution. In order not to make things unnecessarily complicated and not to be seen as suspicious, people often help friends and relatives with a handshake. On a written contract the parties do without all too fast.
Disadvantages and risks of loans without a contract
This loose handling involves some disadvantages and risks. In any case, it requires consistent compliance by the borrower. If this does not work, it will be difficult for the lender to reclaim the borrowed money.
Signing a contract with friends or a relative can present unexpected problems. Despite the best relationship between the contracting parties, the issue of money quickly appears unpleasant. The borrower may feel like an underdog, which can severely disrupt a friendship.
If you forgo a contract, you also create a bad situation in the event that the borrower defaults on interest and principal payments on a sustained basis. If the lender then tries to reclaim his money through the courts, he has the burden of proof.
Another disadvantage of the loan in the private circle: Insurance is missing. Loan offers from banks and financiers usually include insurance, which in the end covers both parties or. whose inheritance protects. These include the settlement in the event of death. The insurance steps in if the credit receiver dies and protects thus the family. In addition, the monthly debt service (interest and repayment) can be hedged. The insurance steps in in case of unemployment or illness and takes over the installments.
These protections don't exist between private citizens. Accident, job loss or illness can lead with it to existence-threatening difficulties.
Blank or collateralized?
A private loan is often given unsecured. Standard bank collateral is unlikely to be considered, especially for smaller amounts.
Instead, security assignments are used, for example the pledging of a vehicle.
Expiration of security assignments for personal loans
- Who decides for it, should take up its data exactly in the credit agreement and let itself hand over the vehicle identity card.
- The borrower can keep the car or motorcycle as long as he pays the agreed installments. It continues to pay insurance, tax and maintenance costs of the vehicle. So he can continue to use it without hindrance.
- Only when the borrower defaults on the debt service and fails to pay the arrears despite reminders, the car or motorcycle is taken over by the lender and shut down. Timing and expiration should be described in detail in the contract, so that it is clear when the lender may claim the vehicle.
Alternatively, a collateral assignment could be made. This does not involve the transfer of physical collateral, but rather the assignment of claims.
Expiry of security assignments for personal loans
- This can be, for example, the claim on a life insurance policy or on a securities account.
- Provided that the account-holding insurance company or custodian bank agrees to the assignment, the assignment can be made for a moderate fee.
- Tip: Since the assignment of life insurance policies in particular entails a number of risks, you should obtain information about the terms and conditions from the insurance company in advance. Make sure you are also aware of possible tax disadvantages.
Security over real property in the case of personal loans
Of course, collateral can also be agreed on the basis of real estate liens. Since this involves notary fees, it is only worthwhile with correspondingly high loan sums. Keep in mind that you will then no longer be able to freely dispose of your property or plot of land. In addition, cancellation approvals also cost money again.
If you have such collateral, you should obtain comparative offers from credit institutions beforehand. In the case of first-ranking collateralization, this is possible even if the creditworthiness is not optimal.
Guarantees as collateral for personal loans
A guarantee can also be used. Anyone wishing to draw up a surety bond must comply with the formal requirements of Art. 492 ff. OR note.
Interest rates and terms
You need to finance an expensive car repair and want to borrow money officially from friends? In addition to a written contract, an interest rate and a suitable term are also required in accordance with standard banking standards. Banks often grant loans to private individuals with 10-year terms. Depending on the creditworthiness, the interest rate can be extremely favorable. Private lenders will hardly accept such a long period for repayment. However, with a shorter term, the monthly debt service increases, which can lead to disruptions in the repayment of the loan.
Interest on debt is tax deductible
In terms of interest rates, loans among private individuals differ from those of a bank. While the contractual agreement is still acceptable to most, understanding usually stops when it comes to the claim for interest. Thereby the interest would be self-evident in case of a bank loan.
Among friends this claim has a slightly disreputable touch. This corresponds with the Code of Obligations, because in Art. 313 OR the law quite naturally assumes no interest among private individuals, unless explicitly agreed upon.
But an interest rate brings with it a whole series of advantages. Interest is calculated according to type. 314 OR calculated and reported annually. Borrowers can also deduct their debt interest from tax on loans between private individuals, provided they can prove it.
Conversely, a lender must also pay tax on its interest income. Because it concerns income, which belongs just like the incomes from an employer-employee relationship or a financial investment into the tax declaration.
Important: The amount of interest cannot be freely determined!
Incidentally, you are not completely free to determine the amount of the interest rate. Although the contracting parties have the right to negotiate their modalities according to their own ideas, they can only do so within the legal framework. You should take these regulations into account:
- The maximum interest rate is set by the Federal Council within the framework of the Consumer Credit Act. If the lender applies a higher interest rate, the loan agreement is null and void.
- The cantons set different maximum interest rates for claims on loans insured by real estate liens. They base this on Art. 795 Abs. 2 ZGB.
- Anyone who exaggerates the interest rate as a lender may be liable to prosecution for usury under Art 157 of the Swiss Penal Code (StGB).
- Contractually agreed compound interest is inadmissible outside of credit institutions according to Art 314 OR.
Concealed gift instead of loan?
Among family members, tax authorities are very skeptical as to whether the alleged loan is not rather a concealed gift. In this way, the family could avoid any gift tax that might be due. Even a very variable repayment date, which only requires repayment when the borrower is "flush", leads the tax office in the direction of a gift.
The only way to convince the tax authorities that a personal loan is a good idea is to have a written contract with a clearly defined repayment period and an interest rate that is more or less in line with industry standards. Without a clear stipulation, the private friendship service can quickly lead to misunderstandings.
Form of a personal loan agreement
A loan agreement is a concurring declaration of intent by two parties, which is not bound to any form. It is a consensual contract, i.e. a commitment transaction that is valid both orally and in writing. Prerequisite is that the agreement does not violate applicable law.
On the other hand, the forms of collateral to be provided are prescribed. If, for example, the contract is a guarantee contract, it must be repaid in accordance with Art. 492 ff. OR should be drawn up.
Despite all restraint, you should therefore insist on a contract both in the position of the lender and as the borrower. In terms of content, in addition to the details of the contracting parties, the loan amount, interest p. a., monthly, quarterly or annual repayments and due dates in addition. Collateral or the waiver of collateral must also be listed. In addition, termination modalities, interest on arrears and the place of jurisdiction must not be omitted.
Each party to the contract receives a signed copy.
If the loan amount is handed over in cash, you as the lender insist on a receipt. If the loan is provided by non-cash transfer, make sure that the purpose of the transfer is clear and save the transfer receipt for clarification of any discrepancies later on.
Maturity and reversal
With a personal loan, both parties enter into obligations. The conditions should therefore be formulated as precisely as possible. These precautions serve to protect all parties involved. For a deal on a handshake between private individuals lacks protection against sudden termination by the lender. If no specific repayment period has been agreed, the lender can terminate the arrangement with six weeks' notice and demand payment of the full amount.
On the other hand, the borrower is protected if someone takes advantage of his predicament, takes advantage of him or misleads him due to his ignorance. If the borrower realizes that the contract is disadvantageous to him, or if someone draws his attention to this fact, he can withdraw from the contract within one year of its conclusion. Payments already made and, if applicable. In this case, the lender must account for the interest received in accordance with Art. 21 of the Swiss Code of Obligations.