A personal loan agreement is a legally binding document that outlines the terms and conditions of a loan between two parties: the lender and the borrower. Whether you’re lending money to a friend, family member or business associate, having a formal agreement in place can help prevent misunderstandings and protect both parties.
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Here’s a step-by-step guide on how to create a personal loan agreement.
1. Identify the Parties Involved
The first step in creating a personal loan agreement is to clearly identify the parties involved. Include the full names, addresses and contact information of both the lender and the borrower. You may also want to include Social Security numbers or driver’s license numbers.
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2. Specify the Loan Amount and Terms
Clearly state the amount of money being loaned. This should be written in both numerical and word form to avoid any confusion. Additionally, outline the terms of the loan, including:
- Interest Rate: If you are charging interest, specify the rate and how it will be calculated (e.g., annually, monthly).
- Repayment Schedule: Detail how and when the borrower will repay the loan. This could be in installments (monthly, bi-weekly) or as a lump sum by a specific date.
- Loan Duration: State the length of time the borrower has to repay the loan in full.
3. Include the Repayment Method
Specify the method of repayment. Will the borrower pay via bank transfer, check or another method? Make sure to include the necessary account details or instructions to facilitate the repayment process.
4. Outline Default Terms
It’s important to outline what constitutes a default and the consequences of defaulting on the loan. This could include late fees, increased interest rates, return of property or legal action. Clearly stating these terms can help motivate the borrower to follow the repayment schedule.
5. Include a Signatures Section
Both parties should sign and date the agreement to make it legally binding. You may also want to include a section for witnesses to sign, although this is not always necessary.
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This article originally appeared on GOBankingRates.com: How To Create a Personal Loan Agreement in 5 Steps
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