Loan agreement contract sample when lending to family & friends

If you’re thinking about lending a family member or friend money then it’s very important that you have a contract between the lender and borrower to avoid any disputes in the future.

Having a contract in place will also act as a safeguard should the borrower default on the debt. In this article we look at how to write a loan agreement contract between family and friends, discuss how to set fair interest rates, charges and late fees as well as looking at the difference between a promissory note, IOU and debt contract agreement.

Drafting a Loan Agreement Contract When Lending to Family & Friends

The reason why many people avoid putting the debt in writing is because they trust their friend or family member completely, this trust really comes into question when the borrower defaults on the loan and can often lead to disputes and broken relationships. Having a contract in place will ensure that whatever happens the borrower and lender can work together to sort the situation out.

Writing a debt agreement contract requires several key pieces of information, this includes the names and addresses of lender, borrower, witness and co-signer. You must also clearly mark the date, loan amount, term of the loan and repayment schedule. For additional safety you can check the credit history of the borrower, apply fees and late charges, have security against the loan and insist that the loan is co-signed by someone who can step in if the borrower defaults.

How Much Interest Should You Charge

If you charge no interest then the repayment schedule should only include the principal amount divided by the term of the debt. If you’ve decided to charge interest then you must charge a fair amount that adheres to your states law on setting interest rates.

The best way to determine the interest rate is by looking at the credit history of the borrower, if they have immaculate credit history then you could charge them less knowing that there is a high chance you’ll get all your money back. If the borrower has poor credit score then you really need to think hard about whether it makes sense to lend your money with a high possibility of losing it.

Charges Late Fees and Received Money

Friends and family members take flexibility for granted and sometimes think it’s OK to make late payments, this can put you under financial distress especially if you’re relying on that repayment for your expenditure. By clearly having all late charges and fees written on the contract will show that you mean business and will give the borrower incentive to make payments on time.

Another important point to note is about received money, any money that you lend to the borrower must be made as a check or bank transfer, avoid offering cash payments as this leaves no paper trail at all and you have no proof that you handed over the money in the first place. Ideally what you want to show is that the day the contract was signed the loan amount was transferred from your account to the borrowers account. If you can add a reference to your check or bank transfer then you should mark it as a loan from lender to borrower.

Is it Better to Secure the Loan or Leave it Unsecured?

If I was lending money to anyone I would insist that it is secured with collateral; this means that if the borrower defaults on the loan you can sell the asset to recoup your money. Leaving the debt unsecured will benefit the borrower however to ensure that there is a real commitment to pay off the loan it’s important to have a security in place.

Guarantor Co-Signor & Witness

Having a guarantor or co-signer on the debt reduces the risk for the lender, this means that if the borrower was to experience difficulty making the payment the co-signer can step in and finish paying off the loan. Having a co-signer reduces the risk however it’s important that you know who the co-signer is and what their credit score is, it’s not uncommon for the principal borrower and the co-signer to default on the loan.

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Promissory Notes vs Loan Agreement Contracts vs IOU

Another important point that many would be lenders overlook is choosing the right contract, sometimes a promissory note, IOU and debt agreement contract all look the same however all three of them are different under law. A Promissory note allows the lender to transfer or sell the debt which might cause problems for the borrower, an IOU simply acknowledges that the debt exists and makes no promise to repay the money. The right contract to use is a loan agreement contract; there is a template below which you can use.

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Loan Agreement Contract Sample

This is a loan/Debt agreement contract between lender Mrs Eileen Mills of 50 Langdon Fields and Borrower Mrs Simone Locks of 52 Langdon Fields for the principal loan amount of $20,000. This contract has been witnessed by Mr Alan Wright of 54 Langdon Fields on the 14th of March 2014.

The loan term is for 12 months and the interest rate which applies on the loan is 10% APR, there is an initial fee of 2% which is $400 and there is also a late fee which is applicable of $20 every time the payment date is missed. The borrower must repay $1834 per month on the 13th of every month as per the payment schedule shown below.

The security on the debt is the borrower’s vehicle which is a Mercedes C Class valued at $24,000, this collateral is in the possession on the lender and will be returned upon completion of the loan repayments. If there are more than three missed payments the asset will be completely transferred to the lender.

The co-signer on the loan is Mr Richard Stock James of 101 Cannon Street who has agreed to make any payments that are missed within 5 working days until the debt is paid off.

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