All over the world people lend & borrow based on pre-existing, trusted relationships – between friends and family, or businesses they know. In many cases these loans are not properly documented, which can cause problems and disagreements about repayments, and may damage relationships. When it comes to managing the money you loan to friends, family, or for business, there are some important things to consider – we’ve compiled a list.
Learn more about formalising loan agreements among friends, family & business, and how Credi makes this process quick, easy and affordable:
When researching what kind of loan agreement to use, how to use it, and who it applies to, there are a lot of important factors at play. Even the details can make the process of giving or receiving a loan easy or very difficult. As an expert on ‘the bank of mum and dad’, aka friends and family lending, I’ve encountered a few things that will help people figure out how and what to use for this.
When drawing up a loan agreement, it is important to remember that it is a legally binding agreement. The agreement should describe the terms on which a loan will be repaid. You should always draft an agreement if you are loaning money to (or borrowing from) friends, family, or a small business/startup. A loan agreement ensures that all parties are aware of the precise terms and conditions or repayment and late repayment.
A loan agreement is formal proof that two parties have a plan to borrow money and pay it back. This protects both parties against potential disagreements, misunderstandings, and helps to ensure the relationship safety. Loan agreements do this by outlining clearly the amount borrowed, the terms of repayment, the interest rate, and provisions for late payment or defaulting.
Oral agreements do occur, but are more difficult to manage if you are loaning or borrowing money from a friend or family member. To safeguard everyone involved, for any loan between known parties, you should have a loan agreement in writing.
A loan agreement should always include repayment terms, contact information of all parties, a payment schedule, agreed upon interest rates, provisions for late payments and a cancellation policy. It should state the amount of money loaned by the lender to the borrower. The contract should also include signatures or e-signatures, as well as what the intended plans are in case of default. The loan agreement should be held online as well as with each person.
For friends and family loans especially, negotiation is important for things such as the interest rate, loan amount, and repayment time, to ensure that the relationship does not get compromised. Loan templates do not allow for such negotiation or tracking of the negotiations, but Credi’s online system does allow for this. You want the agreement to contain the entirety of what the two parties agreed to.
It is up to the parties to agree on what the loan is to be used for. Some examples of loans made by friends and family are for things such as a car, a business startup, or housing.
A loan agreement might be especially useful when borrowing or lending to a family member or friend. They can help protect relationships against disputes about money, terms, or conditions of the loan.
There are many options for drafting a loan agreement, the first and most basic is an online downloadable template, with which you can fill in the blanks. It should include all the necessary clauses of a loan agreement. The second way is to hire a lawyer to advise you on the loan arrangement, however this can be expensive, so it may not be for you. The third is to use a system like Credi, which fulfills the basic purpose of a loan agreement template, but can also track negotiations, and be used as a legal document if need be. The downside to a template is that people usually print off hard copies which are known to go ‘missing’, so using Credi’s cloud system with valid and legally enforceable e-signatures is an easy alternative. Further, for loans under $2000, you can avoid any fees at all.
Loan agreement templates can be useful as a simple document to refer back to. Basic loan agreements can be as easy and simple as a downloaded free template which you edit to fill in the blanks to outline how long a borrower has to pay back money and what interest might be added to the principal. The agreement must also specify general terms that define the legal obligations of each party. For instance, the terms regarding repayment schedule, default or contract breach, loan security, and collateral offered (if any) must be clearly outlined. Some of the more advanced loan agreement templates offer this, however it is unlikely a simple free version will include so much. When using loan templates, another downside is that the document must be tracked. There are many instances where these agreements have gone missing, leaving people unprepared for adverse consequences.
Using a lawyer for drawing up agreement for friends and family loans is far more responsible and legally fool-proof than a loan template. Your lawyer will go through any missing clauses, and legal implications of everything involved in your particular loan. However, this comes at quite a high fee potentially for quite small loans.
Using software or apps to document loans in another option, which combines the benefits of simplicity and low cost of a loan agreement template, with the legal checks and trail of evidence of consulting a lawyer. Most loan software and apps seem to be geared towards peer to peer lending of an impersonal or business nature, meaning that many functions and prices are geared towards that targeted demographic. However, Credi has been created specifically for loans between friends and family and is accessible for people wanting to document both very small and very large loans, as well as track repayments, automate payment processes, and negotiate terms and conditions within the site.
Tim K. DeanCredi Founder Commentator & Expert Family Lending | Bank of Mum & Dad | Neo-Credit Scores Tim K. Dean is a leading expert and commentator in the field of friends & family lending, the Bank of Mum and Dad and neo-credit scores.
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