If you make a loan to any individual or business you should request that the borrower agree to sign a loan agreement. A loan agreement, also referred to as a "promissory note", serves to make the exchange official and grants you legal recourse in the event the borrower fails to repay the loan according to your original agreement. Even if you are loaning money to a trusted friend or family member that you are certain will repay the loan, a loan agreement is vital to validate the exchange. It serves to protect the borrower as well by outlining the amount borrowed and the interest rate, if any, that you are charging on the loan. This prevents you from changing the terms of the original agreement prior to the loan being paid in full.
- Skill level:
- Moderately Easy
Type out a notice stating that a loan is being made. Include the date the money is being exchanged and the city and state where the exchange is taking place.
Include the full names of all parties involved.
Explain within the loan agreement how and when the money should be repaid.
Include the amount of interest you are charging on the loan. Some states have legal restrictions on the amount of interest you may charge. Be sure to check your state's laws before charging interest.
Identify any collateral that is being used to secure the loan. If, for example, the borrower gives you his car title to hold until the loan is paid in full, you will want to include this in the agreement.
Outline the consequences for nonpayment. If you intend to assume possession of the collateral after a certain amount of time passes without the loan being repaid, this should be included in the contract. Although your right to sue the borrower in court for the loan amount is a given, including this in the contract as well will ensure that your borrower understands the risks of failing to repay the loan.
Include a signature line for both borrower and lender.
Sign the loan agreement and ask that the borrower do the same before you give him the funds.
Tips and warnings
- Consider having your loan contract notarised. Notarization serves to legally recognise the validity of both signatures that appear on the loan contract. A loan contract, however, is valid without a notarization, but notarization gives both parties more weight in the event of a court case. Make sure that the borrower has a copy of the original loan contract to refer to in the future should she have any questions about the loan.
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