IOU and Loan Agreement Misconceptions
If you are thinking about lending some money to someone in Singapore, it is important to have it down in writing if you want to be able to collect your money back later.
There are many different kinds of documents that are used to manage debt, in this article, we will discuss the two most common ways, IOUs and Loan Agreements in Singapore.
What Are IOUs?
An IOU is a simple document where the debtor acknowledges the debt. It is generally viewed as an informal written agreement rather than a legally binding commitment. IOUs can be used to record the parties’ initial intentions on the loan before they follow-up with a more formal written agreement.
IOUs may or may not be binding due to its informal nature. There may be uncertainty about whether an IOU is a binding document in Court depending on the language used in the IOU. If an IOU is not held to be binding, there may be limited legal remedies available.
Most of the time, IOUs are produced on a temporary and urgent basis to show the parties intentions and may be followed up with more formalised agreements.
What Are Loan Agreements?
Loan agreements are formally binding signed documents that promises a sum of payment to a specified creditor. It should contain information such as how the debt was incurred, what is the total payment sum, date of payment due, instalment details and payment type. Some different types of loan agreements include “working capital loans”, “term loans”, “facilities agreements” and “personal loans”.
A good loan agreement not only encompasses the terms of the loan, but it also protects you if the borrower defaults on the loan. It should also include interests payable, repayment schedule and default consequences.
One method of protecting yourself is to get security over your loan. This can be in the form of a collateral or a guarantor. A collateral is an asset which can be used to secure the loan. If the borrower defaults on payments, the lender can take possession of this asset and sell it to recover his monies. Collateral can typically be real estate, motor vehicles, shares and stocks of companies and even jewellery.
Another way of securing your loan can be in the form of guarantors. Guarantors are typically individuals who you know have sufficient assets or cash to repay the loan. When the borrower defaults on the loan, the lender is entitled to claim this amount from the guarantor as well.
Should You Use An IOU Or A Loan Agreement?
Having read this article up to this point, you should have a pretty good idea when to use which document.
If the loan amount is small and you do not expect the borrower to default on the loan, an IOU is sufficient. It can be quickly completed and serves as a reminder to the party that there is a sum owing from the borrower to the lender.
If the loan amount is significant or if there is a possibility that the lender may default payments, you may want to engage lawyers to draft a loan agreement for you to best protect your interests.
