When we need to find financing, the first thing we think of is asking the bank for money. But there are other ways to get a loan. Often, due to a lack of knowledge, we do not use one of the tools that is closest to us: loans between individuals.
If the interest that the bank wants to charge you for a loan seems excessive, and you have already ruled out finance companies because, despite being faster, they are more expensive, there is another option: loans between individuals.
This form of community finance can be a good way for both the lender and the borrower to gain something. On the one hand, the lender gets a return for his money; on the other hand, the borrower gets an interest rate below the market rate.
A written contract is the key to avoid misunderstandings
The best way to avoid misunderstandings is to put the agreement in writing. In this private contract between the lender and the borrower, it is very important to put on record:
- Date and place of the signing of the contract.
- Personal details of the parties involved (lender and borrower).
- The amount being lent.
- The repayment period.
- The interest on the loan.
- The settlement of the instalments (monthly, quarterly, annual, at maturity…).
Once the contract between the lender and the borrower has been signed, the agreement must be registered and, therefore, the borrower must pay the ITP tax (Impost sobre Transmissions Patrimonials i Actes Jurídics Documentats) at the tax office of the Tax Agency of Catalonia, by filing form 600 within a maximum period of one month. If the loan is between a parent and a child or between two friends, no tax is payable, because loans between private individuals are taxable transactions, but exempt from taxation.
Although the lender does not have to pay this tax, the Personal Income Tax Act does state that, when a loan has been agreed between private individuals, the lender can be obliged to declare the interest. The legal interest rate is 3%. However, when both parties agree, it is possible that this interest rate does not apply and therefore the lender does not have to pay tax on it. In the end, everything is left within the community.
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