When lending money to another person, whether a family member, friend, or third party, it is essential to act with legal rigor in order to avoid future disputes, tax issues, and difficulties in the event of non-payment. From a professional legal perspective, the primary recommendation is to avoid improvisation and to plan and document the transaction properly, choosing the safest and most appropriate legal instrument in each case.
Experience shows that proper formalisation of the loan is key to ensuring security, certainty, and legality, principles that lie at the heart of preventive legal protection.
Is an oral loan valid? An oral loan is valid under Spanish law; however, it is highly inadvisable for a number of reasons, principally the evidentiary difficulties it creates, possible issues with the Tax Authorities, succession problems in the event of the death of either party, etc. Therefore, although the law recognises it, it is never the recommended option if one seeks legal certainty.
Is a private agreement sufficient? A loan agreement may be validly executed in a private document. This option provides greater protection than a verbal agreement and avoids certain risks, such as:
- Conflicts among heirs, since the credit claim will be documented and included as an asset of the estate should the lender pass away.
- Incorrect interpretations by the Tax Authorities suggesting the existence of a gift.
However, a private document does not provide maximum protection, particularly in the event of default. To bring a legal claim, one must first initiate ordinary declaratory proceedings (at Courts), which entails longer timeframes and higher costs.
In addition, proper drafting requires professional legal advice, as it is essential to define with precision matters such as terms, interest, default consequences, security, extensions, etc.
Is it better to go to a notary? From a legal standpoint, a notarial deed (public instrument) is the safest way to document a loan between private individuals. Banks, for example, always lend money under a public deed executed before a Notary.
A notarial deed allows the lender, in the event of default, to initiate direct enforcement proceedings, which essentially means moving straight to attachment or seizure of the debtor’s accounts and assets. You do not need to litigate first to obtain a judicial declaration of the debt: the instrument is already enforceable, which makes the recovery process much faster. In practical terms, a notarial deed operates almost like a court judgment.
It is also important to note that even if the copy of the public deed is lost, a new enforceable copy may be requested, something that is not possible with a private document. Moreover, the obligation to file the loan with the Tax Authorities will be stated in the deed, even though the transaction is tax-exempt, thus avoiding:
- The presumption of a gift.
- The imputation of deemed interest.
- Or challenges to the transaction in the future.
Although a loan between private individuals is exempt from Transfer Tax (Impuesto sobre Transmisiones Patrimoniales), it must still be filed with the Tax Authorities within the statutory period (generally 30 days). This:
- Provides evidence that the transfer corresponds to a loan and not to a gift;
- States whether or not the loan bears interest;
- Prevents potential penalties or tax reassessments.
This filing is straightforward, but it is advisable to complete it under professional supervision to avoid mistakes.
From a strictly legal standpoint, and in order to maximise protection, security, and effectiveness, the recommended order of preference is:
First, formalise the loan by means of a NOTARIAL PUBLIC DEED, with prior legal advice, even though this entails a higher initial cost.
Second, alternatively, execute a private agreement, properly drafted by a professional and duly filed with the Tax Authorities.
Engaging a specialised lawyer and a notary is essential, particularly when significant sums of money and personal relationships are involved.
