A personal loan is a financial arrangement in which one person lends money to another, without going through a lending institution. This type of loan can be used for a variety of purposes, such as financing a project, paying off debts or meeting unexpected expenses.
What is a peer-to-peer loan?
Credit between individuals is a type of credit arranged directly between a lender and a borrower, without the intermediary of a credit institution.
The creditor undertakes to provide the money, while the debtor undertakes to repay it. The two parties agree on the terms of the loan (interest rate, term, collateral) and determine the structure of the contract.
The practice is permitted between natural persons, or between a natural person and a legal entity. However, a legal entity may not lend to an individual, as this would infringe the banking monopoly.
Inter-company loans are a special case, subject to specific regulations that will not be examined here.
Why lend between individuals?
Credit institutions are subject to extremely strict rules when lending to individuals. The Consumer Code regulates every stage in the conclusion and performance of the contract.
It is a rigid straitjacket designed to ensure that borrowers are kept informed and to protect them from over-indebtedness.
Private loans are much more flexible. It allows people who do not have access to the loan market to access finance.
On the other hand, it is often used by people whose situation is fragile. If credit institutions do not agree to lend, it is because they consider the risk too great. Private lenders therefore need to be extra vigilant, as they do not always have the skills required to assess the risk.
How does lending between individuals work?
Although loans between private individuals are more flexible than consumer credit, they are still subject to a certain amount of formality.
The requirement for a written document
Article 1359 of the Civil Code A written contract is required for loans of €1,500 or more. In the event of legal proceedings, a copy of the contract must be produced even if :
- The lender voluntarily limits its request to a sum of less than €1,500,
- The loan was for more than €1,500 but the outstanding balance is less than this amount.
The form of the contract
The evidential value of this writing will depend on its nature.
Private deeds will have limited probative value.
The lawyer's deed will have probative value will be strengthened because the lawyer, by countersigning the private document, "certifies that it has fully informed the party or parties it is advising on the legal consequences of this act". (article 66-3-1 of law no. 71-1130 of 31 December 1971).
And finally.., the deed will constitute an enforceable title if it meets the conditions laid down in Articles L. 111-3 and L. 111-6 of the Code of Civil Enforcement Procedures. This means that he must :
1) be certified as enforceable, allowing a bailiff to proceed with enforcement,
2) contain all the information required to value the claim.
The nature of the contract
The contract may take the form of a loan contractor a acknowledgement of debt.
The loan agreement must be dated and signed by both the lender and the borrower. The IOU, on the other hand, may be dated and signed only by the borrower.
The Ministry of Finance provides the public with CERFA forms that can be used as loan agreements or IOUs. Naturally, it is preferable to use the services of a legal professional to deal with the most technical or complex requests.
Registration with the tax authorities
Finally, we recommend that you register the contract with the tax authorities.
This formality costs 125 euros (article 680 of the general tax code). Declaring the loan contract to the tax authorities will make it possible to prove its existence in the event of a dispute, and to give it a date certain. This formality is recommended even for family or personal loans.
Characteristics of loans between individuals
Finally, the loan contract must detail the characteristics of the transaction:
Full identification of the partiespreferably in compliance with the requirements of 3° of Article 54 of the Code of Civil Procedure :
1) The private persons will therefore be identified by their surname, first names, profession, place of residence, nationality, date and place of birth.
2) The legal entitiesThey will be identified by their form, their name, their registered office, their representative and the details of their registration in the SIREN register or the trade and companies register.
Loan characteristics :
1) Amount: the amount of the loan?
2) Term: the total term of the loan.
3) Interest rate: the nominal rate, i.e. excluding ancillary costs.
4) Annual Percentage Rate (APR): the rate including all charges, if there are additional charges.
5) Amount and frequency of instalments: will repayments be made monthly, quarterly or annually? Is this an amortising loan or a repayment schedule? in fine ?
6) Payment day: will the borrower have to repay on the first day of the month?
7) How will the funds be made available: will the full amount be paid to the borrower when the loan is signed? Will payment be made directly to a third party (e.g. a company for works, a creditor)? Will the funds have to go through the accounts of a solicitor or notary to guarantee the security of the transaction?
8) Early repayment terms: will penalties apply in the event of early repayment?
9) Breach of contract: what should the lender do to collect the loan if the borrower fails to pay?
Naturally, most loans will have simple characteristics. The amount of the loan will be modest, the repayments will be monthly, and a combination of term and interest rate will be used to determine the amount of the instalments.
However, the lack of a legal framework for private loans means that a wide variety of transactions can be envisaged. This is where the expertise of a legal professional, such as a lawyer, may be required.
Precautions to take with the rate
Both the lender and the borrower need to know two things about the rate.
The usury rate
Private loans are subject to the legislation applicable to usury rates, through the combined application of several texts:
- the articles L. 313-5 to L. 313-5-2, D. 313-2 and D. 754-6 of the Monetary and Financial Code, which make the provisions of the Consumer Code relating to usury applicable to all credit transactions,
- the articles L. 314-6 to L. 314-9 and D. 314-15 to D. 314-17 of the Consumer Code.
The usury rate is the maximum rate for a loan. A lender who charges more than the usury rate may be penalised. Excessive charges will be deducted automatically from the normal interest and, subsidiarily, from the principal of the debt.
The application of legislation on usury will pose two types of problem.
First and foremost, there is not one but several usury rates, depending on the type of loan. This means that the lender will have to determine to which category the loan he is about to grant belongs. This will generally involve setting out the purpose of the loan in the contract. The CERFA forms provided by the Ministry of Finance, for example, do not make it possible to provide this type of detail.
The next step, the usury rate is not determined on the basis of the nominal rate, but on the basis of the annual percentage rate of charge or the annual percentage rate of charge. This brings us to the next point.
Annual percentage rate of charge and annual percentage rate of charge
The Total Effective Rate (TEG) and Annual Total Effective Rate (TAEG) correspond to the nominal rate plus any additional charges imposed by the lender.
This means that if there are no ancillary costs, then the TEG and TAEG will be identical to the nominal rate. These ancillary charges may include the cost of insurance, administration fees, guarantee fees, etc.
The Consumer Code lists the ancillary costs that must be included in the APR at Article R. 314-4 of the Consumer CodeThe list is not exhaustive.
The method for calculating the TEG and TAEG is complex, and depends on the type of rate, and the type of rate depends on the type of credit.
Le APR applies to home loans and consumer credit (Article L. 314-3 of the French Consumer Code).
Le TEG is applicable to all other types of credit agreements (Article L. 314-1 of the Consumer Code). The code refers in this respect to loans intended to finance the needs of a professional activity (Article R. 314-2 of the Consumer Code). These loans are often involved in private lending.
The method for calculating the TEG is described at Article R. 314-2 of the Consumer Code. The APR at Article R. 314-3 of the same code.
The lawyer's advice
There are three ways in which we recommend that you take out a private loan under the right conditions.
Working out the features of the loan
First of all, it is strongly recommended that you carefully study the features of the loan. If the loan is at all complex (ancillary costs, atypical unlocking scheme, etc.), it is strongly recommended that you seek legal advice.
This is necessary to ensure that the usury rate has not been exceeded, and that the clauses of the contract are well drafted. Often, clauses that appear clear do not stand up to the test of trial.
Find out about the debtor
Next, it is advisable to carefully study the debtor's solvency, and to ask for supporting documents. The level of indebtedness, the level of outstanding debts, the quality of account management (e.g. low intervention fees) and the absence of Banque de France records will all be decisive criteria.
If the debtor does not have access to the bank lending market, there is often a good reason. The private lender therefore exposes himself to risks that a professional lender would not have agreed to take. This decision cannot be taken lightly.
Demanding guarantees and anticipating recovery
Finally, the wise lender will need to anticipate recovery. As the saying goes, si vis pacem, para bellum ("If you want peace, prepare for war"). This is the price you pay for a secure loan between private individuals.
There are several ways of anticipating collection, often depending on the debtor's situation. The most common techniques are :
1) to obtain the identity of the employer, to pave the way for the seizure of wages,
2) publish a mortgage.
Dealing with a mortgage is certainly the most complex case, because the value of a mortgage depends on three parameters:
1) its rank,
2) the amount of the preceding entries,
3) the value of the property, in the worst-case scenario of an auction sale on foreclosure.
All this data requires specific skills at the analysis stage. Reading a property sheet, analysing the nature of the registrations, calculating the outstanding balances on previous mortgages, etc., all require specific skills at the analysis stage.
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