Have you ever found yourself in a situation where a loved one asked you to lend them money? To assist someone dear to us, many willingly agree to lend money. Indeed, whether to navigate a difficult financial situation or to finance a new entrepreneurial project, numerous individuals turn to family or friends for funding. However, despite this bond uniting the parties, we suggest that you define the precise terms that will govern this loan.
The Importance of a Written Agreement
Although a verbally concluded agreement is also valid, we strongly suggest that you document the loan in a written agreement signed by all involved parties.
To avoid any ambiguous situations, the loan agreement should minimally contain the following elements:
- The details of the amount borrowed;
- Payment terms (amount, date, frequency, etc.);
- The applicable interest rate (otherwise, the legal rate will apply);
- Consequences in case of payment default[1];
- The date and signatures of the parties.
Please note that a lawyer can assist you in drafting a loan agreement between individuals, particularly to avoid significant omissions and to better understand your rights.
Recourse in Case of Non-Payment
In the event of the borrower defaulting on payment terms, it will be necessary to send them a formal notice to fulfill their obligations. The loan agreement could also stipulate that in case of non-compliance with contractual commitments, the person would automatically be deemed in default, thus sparing you the need to send a formal notice letter.
Following the formal notice stage, an originating application for the recovery of the loaned sum could be filed before the competent court. Before initiating legal action, we suggest considering other means to resolve the dispute, such as negotiation or mediation.
Prescription Period
We draw particular attention to the prescription period for initiating an action to recover the loan. First, it should be noted that the usual prescription period is three (3) years[2]. The period is calculated from the moment the debt becomes due. The starting point varies according to the specific circumstances of each case, particularly considering the agreement between the parties.
Term Loan
In the case of a term loan, the parties agree that the loan amount will be due from a specific date. The starting point of the prescription period begins at this precise moment. For example, if the contract stipulates that the loan repayment will be made in a single installment on January 1, 2025, the person will have until January 1, 2028, to claim payment.
Demand Loan Without Term
In the case of a demand loan, meaning a type of loan for which repayment can be requested at any time at the discretion of either party, the period runs from the date of the loan[3]. The lender must therefore be vigilant because if no payment is demanded during these three years, prescription could be invoked against them. For example, if the loan was granted on January 1, 2025, the lender will have until January 1, 2028, to initiate legal action.
Conclusion
In conclusion, you will note that several elements must be considered when lending money to another person, even if that person is part of your inner circle. In our opinion, the importance of a written agreement should not be overlooked. By establishing clear and detailed payment terms with your borrower, you will avoid contentious situations. We invite you to contact us for any questions regarding a loan situation between two individuals, particularly to understand your rights.
References
[1] It is common practice to include a “loss of benefit of the term” clause, meaning that from the moment the borrower fails to comply with the payment terms, the entire loaned sum becomes due.
[2] Art. 2925 of the Civil Code of Quebec, CQLR, CCQ. 1991.
[3] Pelletier c. Beauchamp, 2022 QCCQ 2921, par. 68.
