Personal Loan Agreement

Personal Loan Agreement
A personal loan agreement is a written contract between two private parties, usually friends or relatives, that details a personal loan arrangement between the two. This usually includes the date of the loan transaction, the projected repayment date, the amount of money borrowed, and any interest rate or other stipulations.

Personal Loan Agreement

Personal Loan Agreement

A personal loan agreement is a contract for borrowing money from family or friends. It formalizes the loan and is legally binding.

What is a Personal Loan Agreement?

A personal loan agreement allows you to formalize a loan from a friend or relative. The agreement will state the terms of the loan, and both you and the person lending to you will sign it.

Personal loan agreements are legally binding, so they offer protection to both you and the person you’re borrowing from in the event of a dispute. They’re a good way to keep the loan arrangement professional and avoid misunderstandings that can negatively impact your personal relationships.

How do I write a Personal Loan Agreement?

A personal loan agreement is essentially a legal document known as a “promissory note.” Templates for promissory notes can be found at a number of places online. Some of them are free while others are available at a small cost. The easiest way to create a personal loan agreement is to use an online template and add the specific terms of your loan agreement. Then you and the person lending to you sign it to make it official.

What’s in a Personal Loan Agreement?

Personal loan agreements should include the name of the lender, the name of the borrower, the date the loan was provided, the repayment date, any interest requested, how the loan should be repaid (lump sum, installments, etc.), any consequences for nonpayment, and the signatures of both parties.[1]

Some people opt to have a third party witness their agreement or get their agreement notarized. These options are up to you and the other party involved, depending on your unique situation and relationship.

Anything included in the loan agreement is legally binding, so make sure that you’re comfortable with everything that’s in it. Also, make sure there’s nothing excluded, because if it’s not in there, you won’t have as much legal recourse in the event of a dispute.

What happens if I don’t repay a loan formalized with a Personal Loan Agreement?

The potential consequences for defaulting on your loan are the same as if you got it from a bank. If you signed a personal loan agreement, the person who gave you the loan can seize any collateral you offered or pursue collection activity. The person can also sue you in court and win wage garnishment or a property lien.[2]

Why should I get a Personal Loan Agreement?

Put simply, money matters are notorious for ruining relationships. While conflict might inevitably arise, a personal loan agreement clearly states the terms of the loan. This can help you avoid misunderstandings that create hard feelings between you and the person you borrowed from.

In addition, a personal loan agreement offers legal protection. For instance, if the person you borrowed from all of a sudden demands a higher interest rate, you can refuse. On the other hand, it also protects the person who lent you money. If a dispute arises and you’re in the wrong, the loan agreement will prove that’s the case.

When should I use a Personal Loan Agreement?

A loan agreement is generally a good idea when you borrow money from a friend or relative. Money matters are one of the most common disputes among families—friction can arise if one party mistakes the loan for a gift while the other views it as a favor to be repaid. Loan agreements help eliminate these misunderstandings for both parties.

But is it necessary for a small amount of money—say, $50? Well, that’s up to you. If you are borrowing an amount that you can comfortably repay by your next paycheck, a formalized agreement may not be that important. However, if you are borrowing an amount that will require a longer period of time to repay and requires multiple installments, a loan agreement is probably a good way to go.

Bottom Line

A personal loan agreement can help you avoid misunderstandings when borrowing money from friends or relatives. They’re a good way to guard against hard feelings and protect both parties in the event of a dispute. However, they’re legally binding, so make sure you read them carefully and agree to everything before signing one.

Works cited:

1 “Promissory Note.” Investopedia, http://www.investopedia.com/terms/p/promissorynote.asp. Accessed on 29 March 2017.

2 Fay, Bill. “Loan Agreements with Family and Friends.” Debt.org, https://www.debt.org/credit/loans/friends-family/. Accessed on 29 March 2017.