Free personal loan letter template contract between family & friends

When we lend money to friends and family it’s really important to have in place a personal loan contract letter template so what both parties are aware of what they are getting into, all too often family ties are severed and friendships are lost because of debt disputes.

To avoid getting into a precarious situation you need to establish at the beginning how much you’re lending and how much you expect back on exact dates, having a contract in place between friends and family will help formalize the agreement which will avoid future disputes.

Writing a Personal Loan Agreement between Family and Friends

When you’re lending money to a member of family or friend it’s important to get a contract in writing. There are several key details that you need to include in the contact and these include the names and address of borrowers and lenders, names and addresses of witness, co-signers, and contract notarizes.

You also need to state the loan amount, date, repayment schedule and any security that will be used as security along with fees and charges. You should ensure that everyone signs the contract and copies are given to every party and kept in a safe place.

When Writing a Personal Loan Repayment Letter from a Template

It’s important to know what kind of contract you’ve drafted, most of the time you’ll have the right personal loan letter template however sometimes you might get it mixed up with an IOU or a Promissory Note. An IOU is just a document which acknowledges the debt but does not promise to pay it back, while a Promissory Note allows a lender to sell the debt or to transfer to someone else.

It’s really important to use the right contract otherwise problems might arise in the future if the repayments are missed and contracts come into dispute. The note-holder, lender, creditor and promise should be aware of the contract that they have entered.

Late Fees and Interest Charges

You should also include initial fees, late fees and charges on the contract, the initial fee should cover the cost of creating the loan agreement. The interest fees should be based on the credit history of the borrower, if the borrower has a history of defaulting then you might think twice about lending them money, however if they have an exceptional credit score you will be rewarding especially if you can change a high rate of interest, you must ensure that the rate set is not excessive and complies with any law regarding loans in your state.

Late fees act as a deterrent to making late payments and also act as an incentive to pay on time. You should not charge excessive fees and anything in the region of $20 to $30 should cover the cost or loss. The late fees should be stated clearly on the contract along with the initial fees and interest rates.

Secured Loan or Unsecured Loan

Securing the loan makes financial sense for the lender as it reduces risk; on the other hand the borrower should look for unsecured loans as they won’t have to give anything up if they experience hardship and default on the loan. The lender should have the collateral in their possession and the market value of the security should be equal to the value of the loan plus interest and charges, this way the lender is not disadvantaged.

Importance of Having Co-Signers and Guarantors

Having a co-signor or debt guarantor also minimizes the risk for the lender, a co-signer promises to pay the loan off it the borrower defaults. When drafting the contract you should make sure that you have a paragraph which introduces the co-signers and when they start paying should the borrower default. Another important point to note is that you should have the co-signor present when the contract is signed so that they’re aware the debt exists. There are too many times when the debt falls into default and the co-signer or guarantor has no idea that the debt exists.



Having a Witness and Receiving Payments

Witnesses are also very important and having one present will make the personal loan agreement between friends and family even stronger. There might be times where the borrower refuses to acknowledge the existence of the debt; this is when the witness can offer invaluable assistance to resolve the matter. Having the contract notarized by a lawyer or solicitor should offer even more protection to the lender which will avoid any disputes in the future.

The Money should not be given in cash as the borrower can refuse that they ever received it, instead the money should be transferred by a check or bank transfer as this will leave a paper trail to show the money went from your account to the borrowers account on the date the contract was drawn up.

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Know the Difference between Promissory Notes and IOU

Sometimes a Promissory Note, IOU and Personal Loan Agreement might look very similar, it’s important that you know the difference otherwise problems might arise in the future when the loan goes into default. A Promissory Note is when the debt can be sold on or transferred to someone else by the lender, and IOU is simply acknowledgement of the debt and does not promise to pay the debt back. A Personal loan agreement will have all the details listed in the second paragraph and you should be able to distinguish the contract from the others because there is a payment schedule.

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Free Personal Loan Letter Template Contract

Here is an example of the type of wording that you should have when writing a personal loan letter template contract.

I the lender Edward Smith of 22 Evergreen Terrace enter into this loan agreement with the borrower Justin Dover of 23 Evergreen Terrace on the 15th of August 2020 for a personal loan amount of $10,000.

The Interest charged on the loan will be 10% and there will be an initial charge of 2% to set up the contract. There will be a late fee of $50 every time a payment is missed. The loan will run for 24 months in total.

The monthly repayment is $600 which should be paid on the 17th of every month, please see schedule below (Have a schedule of all the payments with dates). The final payment will be made on 15th October 2022 upon which the contract will cease.

The security for this loan are the following collateral (BMW M5 Valued at $12,000) which is currently in the lenders possession, if the borrower defaults more than three payments the collateral will be transferred to the lender who will become the new owner.

The loan agreement has been co-signed by Samuel Samson of 25 Evergreen Terrace who has stated that he will make payments on behalf of the borrower in case of default. Please note that this contract is a Personal Loan Agreement and is not a Promissory Note or IOU.

Finally make sure the contract is signed by the borrower, lender, witness, co-signor and then notarized by a lawyer.