Loans – What is peer-to-Peer (P2P) lending? Should i declare?

Recently, I had a question from a group member about peer-to-peer lending in India – France: Savings, Investments & Taxes – Discussions and this post answers this question in detail.

Questions

Hello all, I have a question regarding impots. 3 months back, my friend transferred 10k euros to my family in India(emergency). (EUR to INR) Now I am paying him back every month 1000 euros to his French bank in euros from my salary. (EUR to EUR). I would like to understand how the tax works in this case. Does my friend need to declare the amount in his next year impots? Thanks in advance.

Another similar question on an expat forum

Hello, I am interested in buying a house. So, In France and in Europe, how much money can I borrow from my friends as a hand loan per year? Is it legal to take money from friends and pay in another country? (outside Europe)? Thanks in advance.

What Is Peer-to-Peer (P2P) Lending?
Interest rates of a P2P loan between individuals?
What are the rules of P2P lending in France?
Model letter for the P2P lending contract “reconnaissance de dette”
Should we declare a P2P loan to tax department?
Advantages
Disadvantages
Do’s and Dont’s about your P2P loan
References

What Is Peer-to-Peer (P2P) Lending? How does it work?

Peer-to-peer lending is a type of consumer loan between two private individuals, without involving any financial institution like a bank, etc.
The principle is to avoid the banking system which imposes certain strict obligations and can exclude people without a good financial background.
The lender agrees to lend the money and the borrower to return it. The two people agree on the terms of the loan, then sign a contract.
Though this type of lending is a very old concept, it has become popular again due to the social media and the rise of many P2P platforms.
It is also known as “social lending”, “crowd lending, etc and has increased a lot in recent years especially
The rules explained in this article are there to protect the borrower and the lender.

There is no maximum limit to the loan amount that can be given via P2P lending.

Interest rates of a P2P loan between individuals?

A P2P loan between friends or family is often without any interest charged.
However, the lender is allowed to charge an interest. But, the interest rate should not exceed the maximum rate “taux d’usure” fixed by Banque de France.
The interest rates are reviewed quarterly by the Banque de France and can be found on its website.

What are the rules of P2P lending in France?

According to Article 1359 of the Civil Code, P2P lending exceeding 1,500 euros between two persons can only be made via a written contract.
It can be in the form of a loan contract “contrat de prêt” signed by the lender and the borrower, or an acknowledgment of debt “reconnaissance de dette“, signed by the borrower alone.
The “contrat de prêt” is drawn up in two copies (CERFA form 10 142/ 2062). It must be dated and signed by both parties, who will each keep a copy.
This contract can be made in writing privately (article 1359 of the civil code) or drawn up by a Notaire (this is recommended if the loan is of a significant amount).
It is also possible to register this loan with the tax administration’s registration department. This makes it possible to prove the date of the loan and its existence in case of dispute. This process costs 125 euros (article 680 of the general tax code).
The “reconnaissance de dette” is written on free paper, dated, and signed by the borrower. An original is kept by the lender. The borrower keeps a copy. This is explained in detail in the next section.
There are also private crowdfunding and P2P lending platforms. If you are going to lend via them, you need to verify their registration on ORIAS as an intermediary in crowdfunding, and that it has a banking license issued by ACPR.
What are the modes of evidence in a civil trial?

ORIAS: Organization for the single register of insurance, banking, and finance intermediaries

ACPR: Autorité de Contrôle Prudentiel et de Résolution

Model letter for the P2P lending contract “reconnaissance de dette”

When lending money to a friend or family member, it is better to sign a formal contract between both parties. It is known as “reconnaissance de dette’ in French.

In the event of a conflict by the borrower, this document provides security for the lender, when it contains the following information:

The amount borrowed indicated in numbers and in letters (in case of difference between the 2 amounts, only the value written in the full text will be taken into account)
Term of the loan
Amount, frequency, and date of repayments
First & last name, address, date, and place of birth of the borrower and lender
If applicable, an indication of the interest rate (which must not exceed the “taux de l’usure”, the maximum interest rate of a loan set by the Bank of France)
Date and signature of the borrower

It can be done in the form of an authentic deed “acte authentique” by a Notaire or in the form of a simple deed written and signed by private individuals, without the presence of a Notaire (for example, the template given below).

Une reconnaissance de dette

Je soussigné(e) …….. (last and first name of borrower), né à …… (city and country of birth), le ….. (date of birth), domicilié(e) à ………… (complete address of borrower), reconnais devoir à ……..(last and first name of lender), né à …….(city and country of birth), le …… (date of birth), domicilié(e) à …………. (complete address of borrower) la somme de ……………… (loan amount written in numbers and letters), à titre de prêt en date du …………(date), par la remise d’espèces, ou d’un chèque (cheque number, date and bank name) ou d’un virement (wire transfer, date and bank name) sur mon compte en banque n°….

Les sommes prêtées donnent lieu au remboursement d’un intérêt : (yes/oui or no depending on what was decided). Si oui, l’intérêt appliqué est de ….. %, ce qui représente un coût du crédit de …………€ (interest amount in numbers and letters).

Le remboursement de ce prêt interviendra de la façon suivante :

– je m’engage à lui rembourser cette somme en une ou plusieurs fois avant la date du

(ou bien)

– je m’engage à lui rembourser cette somme en …..mensualités de ….euros, dont la première échéance est fixée à la date du ………… et chaque mensualité ayant comme échéance le ………de chaque mois.

Le remboursement s’effectuera sur le compte de ……………. (last & first name, IBAN of the lender).

Fait à (place) …………, le (date) …………..

Mention manuscrite : “BON POUR + la somme en toutes lettres, capital et intérêts compris”.

(Signature of the borrower)

Should we declare a P2P loan to the tax department?

For loan amounts up to 760 euros, there is no declaration to be done anywhere.
For loan (single or a combination) amounts exceeding 760 euros with or without interest, the borrower must make a tax declaration. The lender is not subject to any such obligation.
For loan amounts exceeding 5,000 euros, the lender or the borrower (usually) must make a loan declaration using the form Cerfa n°2062 to be attached to the tax return.
When several loan contracts of amounts of less than 5,000 euros are concluded in a calendar year, in the name of the same borrower or lender and their total exceeds 5,000 euros, all such agreements must be declared by the borrower or lender concerned, using the annexure n°2062-A.
Also, the interest received by the lender must be declared on his/her income tax return.
In case of omission, the tax authorities may tax the sum as income of unknown origin.

Advantages

Unlike a bank loan, the terms of a P2P loan are freely defined between the borrower and the lender. So, there is a lot of flexibility.
Borrowers considered too risky by banks and credit institutions, might be able to get a loan via the P2P route. This can be very helpful for young entrepreneurs who may not be able to provide solid guarantees for bank loans.
Lenders might get higher interest rates than the rates of other regular financial products like Livret A, LEP, LDDS, Assurance-vie, etc

Disadvantages

P2P lending is a very risky financial product.
The rate of defaulting on the loan is very high in this category.
If you are lending or borrowing via a crowdfunding or P2P platform, you might incur various charges like transaction fees, commissions, late payment charges, etc.
These types of loans are typically not insured and so do not benefit from the deposit guarantee provided by banks.

Do’s and dont’s about your P2P loan

Beware of P2P loan conditions too good to be true. They might charge you hundreds to several thousand euros without ever lending the promised loan.
Irrespective of the loan amount, it is highly recommended to have a formal loan contract in writing and recognize the debt.
This helps in legal action in the event of bad faith by one of the parties, non-payment, or litigation. What are the modes of evidence in a civil trial?
You should not forget to make copies of this agreement.
If you are a lender, you should ask your borrower for various documents like photo ID, address proof, payslips, etc.

References (including official)

Disclaimer

Any finance-related information shared is not professional legal, tax, or investment advice.
The information provided is of an educational and general nature and is not investment advice within the meaning of Articles L. 321-1 and D. 321-1 of the French Monetary and Financial Code.
Investment carries risks of loss and past performance does not guarantee future performance.

europefx.com

7 November 2023 at 12:49 PM

Thanks for explaining the concept of peer-to-peer lending. It’s interesting to know that there is no maximum limit to the loan amount that can be given through this platform.
Are there any specific regulations or requirements for individuals who want to lend money through peer-to-peer lending?

Prasanth
8 November 2023 at 10:19 PM

Thanks for your feedback. Please check the References section at the end.