How to correctly lend and borrow money from someone

April 11, 2016

Are you considering borrowing or loaning money to somebody?  If yes, it is cautionary that you draft a promissory note.

Below are some important terms and conditions that should be included in the promissory note:

1.  Names of all parties. The note should include the names of all parties. If there is a co-guarantor on the loan, the co-guarantor’s name should also be included.

2.  Contact information. The contact information should include the address and phone numbers for all parties, and possibly even an e-mail.  The co-guarantor’s contact information should also be on the loan.

3.  Terms of Notices. If a notice has to be sent by mail, it should preferably be sent via certified mail with return receipt to confirm sending and delivery of the notice.  The notice information should be updated in case any of the parties change their address, phone number, and/or e-mail address.

4.  Payment Terms and Conditions. The note should include all payment terms and conditions.  This information should include:

a. Principal balance loaned.

b.  Interest rate. The maximum rate on a personal loan is eighteen (18%) percent per annum.  Any personal loan with an interest higher than that is known as a usurious agreement.  Late fees and other penalties cannot exceed this eighteen percent (18%) as well. If a loan is above this rate, the interest charged will not be enforceable, and the lender could be liable for attorneys’ fees and legal costs, if the lender files a lawsuit to collect on a usurious note.

c.  Payment Terms and Conditions.  The payment terms should include how much money is going to be paid in each installment, when, and where the payments are to be made.  Each party should keep a copy of the payments sent and received in the case of a dispute. Additionally, another important term and condition to put in a promissory note is what will happen in case the borrower does not make a timely payment.  Some penalties can include late fees, an acceleration clause, as well as attorneys’ fees and legal costs in case an attorney is hired to collect on the note.  There should also be a venue clause to discuss under which state’s laws the loan will be governed under, as well as which county the lawsuit will be filed in, should any dispute between the borrower and lender arise regarding the loan.  Alternatively, there could be an arbitration clause to have an arbitration resolve the matter as opposed to filing a lawsuit

5.  Signatures and date.  The co-guarantor should sign the agreement as well.  The co-guarantor will be held equally liable to pay as the primary borrower.

All parties should sign the promissory note.  The loan will be held enforceable against any borrower who signed the note.   It is also recommended to sign the note in front of a notary.

Should you need to borrow or lend money an attorney can do several things.  An attorney can review a proposed note before it is signed or draft a note.  An attorney can also write a demand letter on the lender’s behalf to collect, or an attorney can send a dispute letter on the borrower’s behalf if there is proof of payment.  Additionally, an attorney can represent the parties in a lawsuit or arbitration.