Simple Payment Agreement
When you borrow money from a credit card company or bank, they provide pages and pages associated with the lending agreement. However, when you borrow money from the bank of "mom and dad" (or other close friend or family member) all you need is a simple payment agreement which states the terms of the loan. That way both parties understand the terms of the loan and what to expect out of the agreement.
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Amount
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The biggest factor in the simple payment agreement is the amount of the loan. Make sure the amount is clearly defined and understood by each party in the equation. For example, write the amount of the loan in monetary value such as $5,000 and not in loose terms such as "party A is going to help party B with a down payment on a car loan."
Term
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The term refers to the length of the loan. The longer the loan, the smaller the payments for the borrower. However, a longer loan also means that a higher amount of interest has been paid to the lender as well. Since most credit card, auto and home loan payments are made on a monthly basis, write this number in months. For instance, a three-year loan would be written as 36 months because there are 36 months in a year.
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Interest Rate
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The interest rate is the premium that the borrower will pay the lender for the privilege of borrowing the money now. This interest rate is paid over time and is added to each monthly payment. You should also clarify what type of interest is being charged. One type is simple interest, which will cost the borrower less and is simply added to the loan amount, or there is compounding interest where interest is compounded on a yearly or monthly basis. To calculate compound interest on a loan, use the calculator found in the Resources section.
Payment Schedule
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This portion of the simple payment agreement will say when each payment is due. For instance, if a loan is to commence on the 15th of the month, the payment can be due each month thereafter on the 15th until the loan balance has been paid in full.
Penalties and Fees
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Even simple payment agreements may have penalty and fee sections. This keeps the borrower motivated to pay on time and the lender happy that, in the case of default, they will be owed additional money. Clearly layout any penalties associated with a late fee. For instance, if the borrower does not pay by the 15th of the month, an additional $25 will be charged.
Collateral
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Some simple payment agreements have some form of collateral attached to it. This means that if the borrower defaults on the loan, then the lender can sell a piece of collateral they have been holding against the loan. The collateral is usually only worth a portion of the overall loan. For instance, if someone borrows $5,000, the lender might ask for $1,000 in cash, or to hold jewelry worth that same amount in case of default. When a lender holds a piece of collateral that is not worth the whole amount, it is called a partially secured loan.
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References
Resources
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