Debt-ridden residents in the UAE are increasingly feeling the heat as loans taken from friends, family or associates often come with the same pressures as bank loans do.
Whether a person feels threatened by collection agents who are out to recover payments, or they simply fear relationships will be severed as a result of the non-repayment of loan, the reality is, there is little effective legal recourse that either party can take, when it comes to borrowing or lending between people you know.
"Borrowing any money from individuals who are not licensed by the Central Bank of the UAE is not allowed. Yes, people do take friendly loans, but the loan has to be given without interest on repayments, as they are unlicensed to be practising such services. It is also haram to charge interest on friendly loans," Ashish Mehta, founder and managing partner of Ashish Mehta & Associates, told Khaleej Times.
In cases where friendly loans are agreed upon, Mehta said the only way either party will have grounds for effective legal recourse if things go wrong, is by documenting the exchange by way of written agreement.
"If the two parties have documentation to confirm the loan amount given as well as a repayment plan, then the lender may initiate a criminal complaint against the borrower, and vice versa, if the terms of the agreement is not honoured." And the best practice is to lend money using a cheque, which will serve as evidence, he said.
In most cases of friendly loans however, Mehta said neither a cheque nor any document is exchanged.
"It's usually based on word of mouth agreement, so they really have no effective legal recourse. That is the risk of lending or borrowing in this way."
In cases where lenders send out debt collectors without documented evidence of the agreement, a police complaint can be filed.
Speaking to Khaleej Times, Atik Munshi, senior partner at Crowe, said a loan from friends, relatives or associates can be taken for "varying reasons, ranging from a few hundred dirhams to large amounts". But in his view, a person should resort to such loans only in desperate situations.
"Money matters, so when something goes wrong, it can seriously affect the relationship with the person from whom the loan is taken."
Munshi said some points to keep in mind when resorting to borrowing such a loan include arranging a formal written repayment structure, laying down a practical and realistic repayment amount, cutting down on luxuries to repay the loan quicker, and not taking demand for payments personally.
Keep in mind while taking a friendly loan
1. Personal loans (from people you know) normally have no formal repayment structure. As a moral obligation, you need to plan an effective repayment mechanism.
2. Repayments can be done on a monthly or lump sum basis. Most such loans are non-interest bearing, but that does not mean repayment plans should not be followed.
3. Bear in mind that such loans too have to be returned in the allocated time and hence plan how much time you will need to repay the loan. Make promises of repayment that are practical enough to be fulfilled.
4. Salaried persons who seek loans from private sources should calculate their monthly saving, which they can set aside from their salary after payment of all essential items. Such savings would obviously be the source from which the repayment can be made.
5. Do not consider unpredictable items like bonus and commissions for your calculation unless there is a surety of such earnings.
6. Additional expenses like holidays, luxury spends, etc. should be avoided to the extent possible till the time you repay. Earlier repayment will increase your credibility.
7. Keep a record of the loan taken and terms on which the same have to be returned.
8. Maintain the record of repayments so there is no chance of ambiguity. If workable, have a signed agreement.
9. Do remember that the lender is giving a loan as a favour. His/her demand of repayment either on due date or earlier should not offend you.
By Kelly Clarke
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