Forms for putting loan agreements in writing
Unpaid debts have ruined many a friendship and familial or romantic relationship. Whenever a significant sum of money is involved, using standardized legal debt forms is a good idea to make the terms of the transaction legally enforceable.
Commercial loans come with formalized contracts outlining their terms and conditions, and so should any loan you grant to someone else. Without debt forms, it is possible for the person borrowing the money to claim that the loans were actually gifts which do not need to be repaid. Even if there is strong circumstantial evidence that suggests the lending party lent the money on the condition that it would be repaid (with or without interest), many such cases wind up in a "your word against mine" situation, which is not where you want to be when you're owed money.
Formalizing a loan agreement with a contract may seem uncomfortable when you're lending money to someone you know, but if there's any possibility that a failure to repay the debt would ruin your relationship with the borrower, it is usually the lesser of two evils.
Types of Debt Forms for Personal Loans
Debt forms can range from the most simple and informal IOUs that indicate only the amount of money involved in the loan, to legally complex agreements involving diverse asset types. You may also have to use a demand letter that formally asks the borrower to repay the loan, before he or she can officially be considered to have defaulted. On the other hand, if you are the borrower and have paid back the money that you borrowed, be sure to get a release agreement indicating that the loan has been repaid in full.
Other types of loan agreement forms you can use to save money on legal expenses include:
- Amortization schedules. An amortization schedule indicates the repayment terms of a loan and takes into account any interest that will accrue on the debt.
- Promissory notes. The function of a promissory note is different from that of a basic IOU: while an IOU sometimes acknowledges only that a debt exists, a promissory note also acknowledges the date by which that debt must be repaid.
- Shareholder loan agreements. A shareholder loan agreement is used when a publicly traded company borrows money from its shareholders for any purpose.
Whenever you lend or borrow money, regardless of whether the arrangement is formal or informal, make sure you put the terms in writing. As a lender, this will protect you in case the borrower defaults on his or her legal obligation to pay you back, and as a borrower, it will ensure you have proof of repayment.