When lending money to close family or friends, I strongly encourage clients to document the loan amount and the repayment terms and conditions and have it signed by both parties. 

While it may seem formal, it is, and that formality can protect you legally.

There is a reason that lending institutions have you sign a note for any loan you obtain, whether for purchasing a car, house, or consolidating your debts. The note executed between you and the person you loan the money to will allow for you to collect upon the note and to move forward with legal proceedings to obtain a judgment if they fail to pay back the loan.

Unlike bank loans, a personal loan can be more flexible and used for many purposes. Typically, personal loans do not require any assets to be used to secure the loan, such as a home or car. It is for this reason that you must have a written agreement between you to ensure that everyone understands the terms of the agreement, including but not limited to the amount of the loan, the repayment terms, any interest that will accrue, as well as terms and conditions if a payment is missed. 

It is always a good idea to also include terms and conditions in the event of default, meaning the person you lent the money to can no longer pay you back. Some things you should think about in the event of default are:

  • Will there be any additional late fees or charges incurred due to a missed payment or defaulting on the payment terms?
  • How long does the borrow have to cure the default and get back on track with repaying the loan? Life happens, we all have had situations arise that we didn’t expect, but how long will you give a borrower to cure the default and get back on track? 
  • If you do need to file legal proceedings to obtain a judgment so that you can collect upon the debt, will you hold the borrower responsible for any attorney or legal fees you incur as a result of having to file in court?

Although you want to assist family or friends, remember that any loan is a contract and legally binding as soon as both parties sign it. There are several reasons you would want to have a written agreement between you. Having a formal agreement will show the borrower that you are serious about the borrower paying you back. If the person you are lending the money to doesn’t want to sign an agreement, it is a clear sign that they do not intend to pay back the loan.  

Many people feel weary lending money to family or friends because of the awkwardness of asking for the money back. Having a written agreement between you takes the awkwardness out of the situation, and you merely can refer to what both of you agreed to as a means to friendly remind the borrower that a payment is due. Before lending any money to anyone, it would be in your best interest to consult with an attorney who can draft and review any agreements to protect your interest and give you advice on what arrangement is best in your circumstances.

If someone owes you money and you want to pursue payment and/or obtain a collection assessment, please contact our office. 

About Andalman & Flynn Collections: For decades, businesses and professionals have been turning to the experienced collections attorneys at Andalman & Flynn for their debt recovery needs. A licensed collections agency, their experienced team successfully navigates the complex laws surrounding debt collection practices. The firm combines cutting-edge technology with savvy, effective debt resolution methods that result in high success rates and fast recovery times. For more information, please visit www.andalmanflynncollections.com.