DEFINITION of Friendly Loan

A friendly loan is a financial agreement between associates. This type of financing is known as a friendly loan because the agreement is usually made between friends, family or acquaintances. These types of loan agreements are rarely legally documented and stipulations are usually verbally agreed upon.

BREAKING DOWN Friendly Loan

Friendly loans are the most common type of loan agreement, whether it be among friends, family or associates. In many circumstances failure to repay such loans cannot be legally challenged, as most friendly loans are made in good faith between closely associated parties. These loans are also not reported to the credit bureau and do not reflect one's credit score.

It is possible that a friendly loan might be offered to a personal connection as a way to beat interest rates that might be charged by a financial institution. This can be seen as a benefit for both parties as it lets the borrower access funding at a discount and the lender gains an investment opportunity. Any interest collected by a lender in a friendly loan will likely need to be reported to the Internal Revenue Service (IRS) as imputed interest for tax purposes.

Ways the Borrower of a Friendly Loan Can be Held Accountable

When a friendly loan is offered and agreed upon, it could include a formal promissory note or loan agreement documentation of the transaction. A promissory note, would serve as a legal record of the amount borrowed and the terms stating that the borrower will pay back that amount.

With a formal loan agreement the terms may be more detailed, defining the loan as secured or unsecured. A friendly loan that is secured means there is some form of collateral the borrower agreed would be surrendered if they default on the loan. An unsecured friendly loan would lack such collateral, but if the borrower defaults and there is a formal loan agreement signed by both parties it could be the basis for legal proceedings to recoup the debt from the borrower.

Friendly loans can take the form of cash granted to a borrower. This maybe occur when a party that is more likely to be approved by a bank or financial institution takes out a loan and then gives those funds to a relative or friend who would not have been approved. This might be done to help the friend launch a business venture for instance. In such an example, the party who secures the funding and then loans it out would still be responsible for paying back the bank. Thus if the friend or relative does not pay them back, they are still accountable to the bank or institution for that funding.