IOUs: Personal Loans to Friends and Relatives in Singapore

Last updated on June 25, 2019

In times of financial woes and hardship, a friend may turn to you for help. After generously extending a loan recorded with an IOU, how do you go about recovering the debt and interest in accordance with the law?

Do You Need a Licence to Lend Money?

The Moneylenders Act prohibits unlicensed moneylending businesses. It does not prohibit the act of moneylending. The giving of loans or a number of loans to friends or family does not constitute the business of moneylending, unless there is a system and continuity about the transactions or if the alleged moneylender lent others money freely and readily. Therefore, loans to friends and family do not require a licence.

Charging Interest

It is legal to charge interest in a loan to friends and family, as long as you are not carrying on the business of moneylending. Some Singaporeans mistakenly believe that you must be a licensed moneylender before you can charge interest on a loan. This is not so.

Section 3 of the Moneylenders Act contains a presumption, whereby persons charging interest for a loan are presumed to be moneylenders for the purposes of the Act. The section reads as follows:

“Any person, other than an excluded moneylender, who lends a sum of money in consideration of a larger sum being repaid shall be presumed, until the contrary is proved, to be a moneylender.”

However, this presumption is rebuttable. The presumption can be rebutted by proving that one is not carrying on the business of moneylending. If so, one is not a moneylender under the Act, and need not be licensed.

How Much Interest Can You Charge?

The Moneylenders Act and the Moneylenders Rules 2009 stipulate the maximum permissible interest rate (see rule 11) for licensed moneylenders. This restriction does not apply to personal loans to friends and families not made as part of a moneylending business.

To avoid legal complications (where you may be mistaken for a loan shark), an interest rate clause could be drafted in this form: “____% interest rate / maximum allowed by law”.

Are IOUs Legal?

Yes, an IOU is a simple contract stipulating the terms of the loan. They are different from promissory notes, which are governed by more formal requirements under the Bills of Exchange Act.

Holding Security or Collateral

If the loan you are thinking of making to a friend involves a large sum of money, you might want to get security or collateral for the loan, and include this in the IOU. A security could be a valuable property. In the event that your friend becomes a bankrupt, this secured property could be used to repay your loan.

The laws pertaining to securities are complex. Securities may require registration. Legal advice should be sought if you wish to take security for a loan.


It is possible to get a third person to guarantee a loan in the event of default. For a guarantee to be enforceable, the guarantee must be in writing, and signed by the guarantor. Ideally, all parties, including a witness, should be present and sign the document together.

Debt Collection/Debt Recovery Professionals

If a friend or relative owes a debt and refuses to pay, you may consider engaging a debt collection firm to recover the debt for you. Debt collection firms usually require proof of the debt before pursuing a claim on your behalf. Different firms charge different fees. The debt collector may take a cut of the recovered sum plus an upfront fee.

There is no law that specifically regulates the activities or methods of debt collectors. In general, debt collectors must act within the confines of the law, and cannot use violence, damage property, or create a nuisance.

Legal Recourse

If negotiations fail, you might want to consider legal recourse, especially if a substantial amount of money is involved. Do note that the Small Claims Tribunals (SCT) does not handle claims involving loans. However, if the circumstances involve a contract for the sale of goods or provision of services, the SCT has the power to adjudicate over the matter.

To recover a loan, it may be wise to consider engaging the services of a lawyer. This may be a more appropriate option compared to hiring a debt collector. Alternatively, you could seek free legal advice.

A lawyer can be engaged to issue a letter of demand on the debtor. If the debtor ignores the letter of demand, legal proceedings can be commenced to recover the debt.

If the debt is straightforward and supported by strong evidence, summary or default judgments may be obtained and a full-blown trial may be avoided. Alternatively, mediation may resolve the dispute.

Read more about the civil litigation process in Singapore in our other article.

Evidence and IOUs

When you initiate a legal action, your case would be stronger if you could adduce compelling evidence proving the existence of the loan. These may include witnesses, text messages, email exchanges, IOUs, bank transaction statements and the like. It is probably a poor idea (evidence-wise) to scrawl a couple of words such as “John owes Peter $5.” on a piece of napkin, and expect this to pass off as an IOU.

How to Write an IOU

Hiring a lawyer to draft an IOU is not strictly necessary. However, this would be highly desirable, especially if the sum of money involved is substantial.

An IOU should ideally contain all the details of the loan, including:

  • The identities of the parties involved
  • The payment frequency
  • Date of payment
  • Method of payment
  • Applicable interest

The following is a sample IOU that you may use to record your loan:

I, (name), (NRIC number) of (address), contactable at (contact number) and (email address), acknowledge receipt of the sum of S$_____, being a friendly loan extended to me, at my request, by my friend, (name) (NRIC number) of (address) today, by way of cash / cheque, (bank’s name) cheque no. __ dated __ .

I promise to repay this sum in full to him/her by (date of repayment). Dated this __ day of (month) (year).

Have a witness present during the signing of the IOU

After drafting an IOU, it is advisable to arrange for a witness to be present at its signing in case the debtor makes allegations of duress, undue influence or mistake when agreeing to the arrangement later on.

The IOU note can therefore also include the witness’ signature, name, NRIC number, address and contact number.

Limitation Period to Make a Claim

If the debtor does not repay his debt, the IOU has a limited shelf life:

  • If the IOU has a stipulated repayment date and the debt goes unpaid, you will have to commence legal proceedings within 6 years from the stipulated repayment date.
  • If the IOU does not state a repayment date, the 6-year time limit starts running from the date when the cause of action arises. Specific legal advice may be necessary to determine the exact limitation period.