Car dealerships and mortgage companies negotiate and approve loans as a routine part of business, requiring borrowers to sign form after form with all the terms and conditions of the loan, a process many joke about as “signing their life away.” Individuals who lend money to a family member, friend, or other acquaintance would do well to take a lesson from these professional lenders.
Shakespeare’s Hamlet provides good insight with the character who said “neither a borrower nor a lender be; for loan oft loses both itself and friend.” In spite of the wisdom found in the quote, loans between friends and family are common and account for billions of dollars in transactions every year. Most typically, people borrow money for a down payment on a house or to start a new business.
Should you decide to loan money, it is important to protect yourself and your relationship by first establishing a written loan agreement. This is especially important if the amount of money being lent is sizeable. When drafting your loan agreement, you will want to include the following five terms:
• Amount of the loan and the interest to be repaid, if any, outlined in an amortization table that notes the start and end dates of the loan repayments
• Timeline and dates of repayment, and amount due each payment period, which is often monthly
• Applicable late fees, if the loan is paid a certain number of days after the scheduled due date
• Collateral, which may be a valuable asset such as the borrower’s car, that secures the loan
• Cosigner information, for added security, in the event the borrower is unable to pay
Everyone’s circumstances are different, which means each agreement will be unique and tailored to include the terms that are most pertinent to the loan arrangement and that give both parties a good level of comfort and legal standing. Other terms you may want to include in your loan agreement address issues such as prepaying the loan, modifying the terms of the loan, having the proper legal documentation and making the appropriate filings to ensure that the security interest can be enforced and defining the legal recourse available to either party if necessary.
Most people don’t worry about lending someone ten dollars to cover their lunch, but when lending larger amounts, the reasons for having a written loan agreement are many. When a written loan contract exists, both the borrower and the lender know, and agree to, up front and in writing, the terms and provisions of the loan. The lender will not be able to change the amount of interest charged, for example, once the initial rate is in writing. The borrower has a formal repayment plan to follow and can establish their finances accordingly. And, in the event disagreement arises, as sometimes occurs, a properly documented loan agreement will serve as legal proof of the terms to which both parties agreed and can then be enforced through a Court of proper jurisdiction.
As an estate attorney in Montgomery County, I have seen where a formal loan agreement would have helped an Executor enforce money lent to another friend or family member by a Decedent which allow for the funds to be paid back to the Estate at the time their loved one’s estate is being administered. I urge lenders and borrowers alike to always press for a formal loan agreement for everyone’s protection and to consult with an attorney who can assist you in properly documenting your loan. Please feel free to contact me at firstname.lastname@example.org or 267.399.3710 for your free initial consultation on how I can assist you in properly documenting your loan.