Lending money to friends, relatives, or acquaintances is a common practice in our reality. However, goodwill and mutual trust are often insufficient to ensure that the loaned funds are returned on time and without complications. The well-known saying, "Lend money and lose a friend," accurately reflects the risks associated with undocumented or incorrectly drafted financial transactions.

If you want to ensure that lending money does not turn into a source of stress, litigation, and ruined relationships, it is essential to know how to execute a Loan Agreement Between Individuals in full compliance with Georgian legislation.

In this comprehensive guide, we will review all legal and practical aspects of loan execution. We will compare a handwritten receipt (promissory note) with a notarized agreement and discuss debt collection mechanisms, interest-bearing loans, liquidated damages (penalties), and methods of collateral. This article will help you make the right decision to protect your financial interests.

What is a Loan Agreement according to the Civil Code of Georgia?

According to Article 623 of the Civil Code of Georgia (CCG), under a loan agreement, the lender transfers ownership of money or other fungible things to the borrower, and the borrower undertakes to return things of the same kind, quality, and quantity.

When we refer to a loan between individuals, we mean a situation where both parties - the lender and the borrower - are natural persons (and not a bank, microfinance organization, or a company).

While the law does not mandate a complex legal contract for small amounts, selecting the correct legal form is vital when dealing with significant sums. There are three primary forms of lending: an oral agreement, a simple written form (receipt/promissory note), and a notarized agreement.

Primary Forms of Lending and Their Risks

To understand why proper execution is necessary, we must analyze each method in detail:

1. Oral Agreement (The High-Risk Path)

Lending money orally usually occurs between very close individuals. No documentation is created.

• Risks: If the borrower refuses to repay, the lender will have virtually no evidence in court. According to the Civil Procedure Code of Georgia, the burden of proof lies with the claimant. Witness testimony alone is often insufficient to prove a monetary obligation, especially regarding large sums.

• Advice: Avoid oral transactions for any amount that would cause financial or psychological discomfort if lost.

2. Simple Written Form - The "Handwritten Receipt"

A receipt is a document drafted by the borrower acknowledging that they received a specific amount from the lender and committing to its return.

• Advantages: It is a simple, fast, and cost-free procedure. In the event of a dispute, a correctly drafted receipt serves as solid evidence that the loan was indeed issued.

• Disadvantages: If the borrower fails to repay, you must file a lawsuit. Litigation can last months or years (through the first instance, appellate, and supreme courts). Additionally, you will incur state duties and attorney fees. There is also a risk that the borrower may contest the authenticity of the document (e.g., claiming the signature is forged), requiring a calligraphic forensic examination.

3. Notarized Loan Agreement (The Most Secure Path)

This is a document drafted and certified by a Notary Public. The notary verifies the voluntary intent of the parties, confirms their identities, and explains the legal consequences.

• Advantages: Maximum security. The most significant benefit is the possibility of issuing a Writ of Execution (discussed below). Challenging the authenticity of a notarized document in court is extremely difficult.

• Disadvantages: Incurs financial costs (notary fees) and requires the physical or remote presence of the parties before the notary.

Receipt VS Notary: Detailed Comparison

Why is a Notary the Lender's "Best Friend"?

The primary advantage of a notary in a loan between individuals is the inclusion of a clause for the issuance of a Writ of Execution.

How does this work? If you lend $10,000 based on a simple receipt and the borrower defaults, you must sue, pay court fees, and wait 1–2 years for a verdict. During this time, the borrower might hide assets.

In a notarized agreement with an execution clause, you do not need to go to court. Upon default, you return to the notary with proof of non-payment (e.g., a bank statement), and the notary issues a Writ of Execution. You take this document directly to the National Bureau of Enforcement or a private bailiff, who immediately attaches (freezes) the borrower’s accounts and assets.

Essential Requirements for a Loan Agreement or Receipt

A loan agreement is legally sound only if it contains the following mandatory clauses:

1. Date and Place of Execution: Specifically where and when the deal was made.

2. Identification of Parties: Full name, personal ID number, registered and factual addresses, and contact numbers.

3. Subject and Amount: The exact amount must be indicated in both figures and words (e.g., 5,000 (five thousand) GEL).

4. Currency: Specify the currency. Note: According to the Civil Code, loans up to 200,000 GEL must be issued in the national currency (GEL). Violating this can render the agreement void.

5. Confirmation of Transfer: The receipt must state: "I, (Borrower), have received the amount of..." It is ideal to transfer funds via bank wire with the description: "Loan per agreement/receipt."

6. Repayment Schedule: A specific date for full repayment or a clear installment schedule.

7. Interest and Penalties (Liquidated Damages): Specify the interest rate and the daily penalty for late payment (e.g., 0.1% of the principal per day of delay).

8. Signatures: Both parties must sign. For receipts, it is preferable for the borrower to write the entire text by hand to minimize forensic risks.

Interest-Bearing Loans and Legal Restrictions

Georgian law allows interest-bearing loans between individuals but imposes strict caps to prevent usury:

• Effective Interest Rate Cap: The annual effective interest rate must not exceed 50%. Any clause exceeding this is legally void.

• Penalty Limits: The total volume of daily penalties and fees must not exceed 0.27% of the remaining principal per day. Total penalties cannot exceed 1.5 times the principal amount.

Collateral: Maximizing Security

If a borrower has no assets or income, even a Writ of Execution may fail. To mitigate this, use security mechanisms:

1. Suretyship (Guarantee): A third party (the guarantor) undertakes to be liable if the borrower defaults. This must be in writing.

2. Pledge and Mortgage:

   • Pledge: Used for movable property (e.g., a vehicle). Registered at the Service Agency.

   • Mortgage: Used for immovable property (e.g., an apartment). Must be registered in the Public Registry.

   • Mechanism: Upon default, you may request the sale of the mortgaged property via auction to satisfy your claim from the proceeds.

Procedure Upon Default: Step-by-Step

1. Communication: Send a formal written notice (via mail or email) providing a reasonable grace period for repayment and stating intent to pursue legal action.

2. Legal Response:

   • For Receipts: File a lawsuit and request an Injunction (Securing the Claim) to freeze the borrower's assets until the case is resolved.

   • For Notarized Agreements: Obtain the Writ of Execution from the notary.

3. Compulsory Enforcement: The bailiff initiates enforcement measures: attaching bank accounts (incasso), seizing property, or deducting from wages.

Conclusion

A Loan Agreement Between Individuals is not a mere formality; it is your primary financial safeguard.

• For small amounts: Use a detailed handwritten receipt and bank transfers.

• For substantial amounts: Use a notarized agreement with a Writ of Execution clause.

• For very large amounts: Secure the loan with a mortgage or solid suretyship.

 Disclaimer: The information provided in this article is for informational purposes only and does not constitute individual legal advice. Please consult an attorney to discuss your specific case.