DIY Loan Agreement
It is not necessary to go through the expense of having a lawyer create a loan agreement. You can create your own legally binding loan agreement through a promissory note. This note spells out the amount loaned, on what date, from whom and to whom, and the interest rate. It also explains the payment schedule, fees and penalties.
The benefits of a promissory note don't just stop at having legal protection. Having a written, signed document prevents the parties from claiming they misunderstood the agreement or claiming they expected something different. You can avoid potential future disagreement by preserving the upfront agreement in writing.
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Instructions
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Draft a promissory note that explains who is lending money, to whom, and for how long. If you want to charge a fee for processing the loan--banks often charge several hundred dollars--spell that out in the note, and describe when and how that fee will be paid.
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Determine a repayment schedule. Decide whether you want regular installment payments, a balloon payment, or a combination of the two. If you want installment payments, decide how much each installment should be and how often it should be paid. Be specific. If you want to be paid $500 a month, specify which day of the month you are owed that money, and how you will receive it. For example: By noon on the 15th day of each month, you will receive $500 transferred directly into your checking account.
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Determine the penalty for late payment. Decide whether to have a grace period. Decide when the penalty will be due--will you collect it right away, or will it be rolled in with the remainder of the loan.
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Consider whether you want collateral to back the loan. If you do, describe exactly what that collateral is, find a method of ensuring that it is not already pledged as collateral on another loan or agreement, and figure out how to collect the collateral if the borrower defaults. If the collateral is something small and portable yet valuable, like a rock-climbing gear rack or a diamond ring, you might agree to keep it until the loan is paid. If the collateral is large, like a house, you need to agree upon a method of collecting on it in case of default.
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Determine how many payments would need to be missed before you'd declare that the borrower had defaulted. Decide whether consecutive payments would need to be missed, or whether a total number of payments would need to be missed. For example, if you state that three missing payments indicates that the borrower has defaulted, and the borrower pays January, misses February and March, pays April, and misses May, you need to decide whether the April payment restarts the three-month clock.
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Decide whether anyone is allowed to change the provisions within the promissory note. Determine what provisions, if any, are subject to change, and what the process for change would be.
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Have all parties sign the promissory note in the presence of a notary public. Keep a copy on file with all parties.
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Tips & Warnings
Lending always carries inherent risk.
References
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