Loaning money can sometimes be the culprit behind a dissolving friendship between two friends. Therefore, if you're borrowing from or lending money to a friend, think about your relationship first. Money will always come and go, but once a friendship is destroyed, sometimes it's gone forever.
If you must borrow money from a friend, it's best to put your friendship aside and simply think of it as a business deal among friends and draft an official money loaning agreement with all the details that surround the transaction. In other words, it must be clearly represented as a legal loan agreement letter. It will make the agreement more serious overall.
The letter is intended to protect both parties entering into the agreement. It's best to have legal proof of who borrowed the money, when they borrowed it, and the exact terms for paying it back. Legal proof of all the details involved will protect the bank accounts of either party as well as the friendship. Also, it's best have the letter signed in front of a notary, even though it may require a small fee in most cases. If this isn't possible, then at least have witnesses sign the letter. Also, it's important that both parties each have a copy of the agreement.
If you want to keep your relationship intact, follow these steps to ensure that everything goes as planned and the loan is paid back as intended.
1. Clearly identify both parties as well as the details of the loan.
The first paragraph should clearly identify the name of the lender and borrower along with the amount of money loaned and the date when the loan was originally made. For example, Darci Barton loaned Sandy Smith the amount of $2,500 on DATE.
2. Include the loan's interest rate.
Agree upon an interest rate regarding the loan as well as the exact method you intend to use in order to calculate the interest of the loan. Alternatively, if both parties agree there will be no interest charged, be sure to include that in the terms of the loan as well.
3. Outline the repayment terms of the loan.
Clearly outline the loan's repayment terms in detail. Often, these kinds of loans are repaid immediately after the borrower receives a significant lump sum of money following a financial event, such as a lawsuit settlement or tax refund. If this is the case, be sure to include those specific details concerning the exact event that will trigger the due date.
On the other hand, if payments will be made for repaying the loan, include a detailed description of the repayment schedule, including the beginning date and final payment date as well as the amount of each payment.
4. Officially sign and date the agreement.
Both parties need to sign and date the formal document along with a third-party witness if possible. The witness doesn't have to be a friend or family member. In fact, they should preferably NOT have a relationship with either party. For instance, an employee at your local bank is an excellent choice to use as a third-party witness since they have zero vested interest in how the loan is collected or in the loan itself. There's also the option to have it notarized by an official notary public as well.
Sample Loan Agreement Letter Between Friends
Sandy Smith (borrower)
Darci Barton (lender)
Original Loan Date: DATE
Entire Repayment Due: DATE
Total Amount of Loan: $2,500
TERMS OF LOAN AGREEMENT LETTER:
I, Sandy Smith, borrowed $2,500 from Darci Barton on DATE. Daric Barton and I both agree that the loan will be repaid using a series of scheduled financial payments.
I, Sandy Smith, will submit a monthly payment due on the 1st of every month using a personal check in the amount of $104.20 to Daric Barton. The first payment will be made on DATE and the last payment will be made on DATE.
I, Sandy Smith, agree to a $5 late charge per day for any payments that are late until the entire loan is paid in full on DATE.
Both parties agree to the terms surrounding the said loan.
Signed and dated today on DATE.
(Sandy Smith's signature)
2100 Freeport Rd.
Dixon, IL 64856
(Darci Barton's signature)
1958 Mountain Rd.
Dixon, IL 64856
(Kathryn Heigle's signature)
Kathryn Heigle (third-party witness)
Trust and Loan Bank representative
438 North Ave.
Dixon, IL 64856
By Andre Bradley