FRIENDLY LOANS - LEGAL OR ILLEGAL?

You may inevitably find yourself in situations where you'll need to procure loans from; or give loans to friends, family and business partners.

But are these loans legal and enforceable; should the worst case scenario arise?

In Malaysia, friendly loans with interest are legal if they comply with the law, but there are strict requirements and conditions that must be met to avoid falling foul of the law, particularly the Moneylenders Act.

In general terms; here are some examples of friendly loans that are legal and illegal:

LEGAL:

(i) Loans made between family members, friends, business partners without profit making intent;
(ii) Loans made on an ad-hoc, irregular basis;
(ii) Loans with reasonable, arms length interest (ie. comparable to Bank Negara rates).

ILLEGAL:

(i) Loans made commercially between unrelated parties;
(ii) Loans made on a regular basis in the course of a business; without possessing a license under the Moneylenders Act;
(iii) Loans with an exorbitant, unconscionable interest rate (anything above 18% p.a. for an unsecured loan is dangerous).

BEWARE: In cases where the courts deem, on the balance of probabilities, that a loan runs afoul of the Moneylenders Act; you amy not even be able to recover your principal (what more the interest).

The cases below demonstrate:

(i) Cheong Heng Loong Goldsmiths Sdn Bhd v. P.P. [2020] 1 LNS 552
In this case, the court voided a loan agreement because the lender was unlicensed under the Moneylenders Act. The lender could not recover both the interest and the principal, as the loan was deemed illegal.

(ii) MK Associates Sdn Bhd v. Taisom (M) Sdn Bhd [2022] MLJU 33
This is one of the latest rulings confirming that if a lender is found to be carrying out moneylending activities without a license, the entire agreement (including the principal) is unenforceable.

In conclusion, my personal advice would be to only offer loans if you are fully prepared to do so without charging any interest whatsoever. Providing a loan with interest, even on a friendly basis; comes with significant risk - and in the worst case scenario, you may not even be able to recover your principal.

It may be noble to help someone in need; but remember - when lending money to a friend; first decide which you need more.