How to Write a Personal Loan Agreement
A family member or a friend has asked to borrow money from you and you have agreed. While a verbal agreement can work between people that know each other, a written personal loan agreement can eliminate misunderstandings. It is also treated as a legally binding document enforceable by the court when both the borrower and lender sign it.
1. Discuss the loan parameters. Before turning over money, you need to have a discussion with the borrower. That discussion should include the amount of money to be borrowed, how repayments will be made and the interest rate, if any. You should know the reason for the loan as well.
2. Put it in writing. Take out a piece of paper and date it. Then, list the borrower’s name and address followed by your name and address. Use complete information and avoid including nicknames. Use lined paper or type your loan agreement out.
3. Include the loan details. In the body of the personal loan agreement, you should spell out the reason for the loan, the amount of money lent, the interest rate charged and repayment information. If you expect periodic payments, such as monthly or quarterly payments, then list that. If you expect a lump sump repayment, then say so. Identify repayment dates such as “on the 15th of the month” or “funds will be due in full one year from this date.”
4. Provide a signature area. Personal loan agreements may not be valid in every state unless both parties sign and date the agreement. Print each person’s name and provide a line above that name for a signature. Below this section add in a line with the word “date” listed below that. Consider having the agreement signed in front of a notary public and stamped.
5. Distribute the funds. A personal check is the best way to show that cash has exchanged hands. Write up a check for the desired loan amount and note its purpose on the check’s memo field. Update your check register and make a copy of the check before giving it to the borrower.
6. Make copies of the personal loan agreement. Keep the original loan document and make a copy for the borrower. You may want to make a second copy for yourself to keep elsewhere or scan the form and save it to your computer.
Consider using a legal format for crafting your personal loan agreement. Sample forms are available for free through legal websites such as Nolo.com, or they may be available from your state. For large loans, consider having your loan agreement reviewed by your attorney. He or she can advise you on the language required and your options should the borrower default. If you experience repayment problems, work with your friend or family member to obtain payment. Legal action should be a means of absolute last resort as such a move on your part might forever damage the relationship. Consider modifying the loan terms or extending grace to the borrower as needed.
See Also — How to Fix Your Defaulted Car Loan