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Sample Contract to Borrow Money from Friends and Family

By Edited Oct 17, 2015 0 1

This sample contract to borrow money from a friend can be used by anyone that is looking for a loan from an acquaintance, but feels the need to make it fully legit and legal.  This is actually a really good idea for both the lender and the borrower, since money has a tendency to split friendships and break up families, when not paid back or one party feels they were treated unfairly.  To help avoid this type of situation, it might be in your best interest to come up with something in writing, so both sides know exactly what’s going to occur during the transaction.  I will provide you with multiple examples, all of which can be altered and adjusted to suit your personal needs.  Protect yourself and do it the right way.

Promissory Note, 20xx, Form #76-121, 50 Pgs
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Sample Contract to Borrow Money – No Interest

There are plenty of times that you might want to lend out cash, but not charge any form of interest.  In the example below, such terms are covered.  Also included is a section regarding late payment penalty, which can be removed if you don’t wish to add something like that in the contract.

On (today’s date), I (lender’s name) am borrowing the sum of (use the numeric form and spell it out) dollars to (borrower’s name).  The sum is being given to him in the form of (cash, check, money order) and repayment is required.

Payments will be due on the 1st day of each month, beginning (First day of the following month of the contract signing).  The total of each payment is (dollar amount in numeric form and spelled out) dollars, until such time the entire balance is paid in full.

Payments not made until the 11th of each month or later will incur a late fee of (numeric value and spelled out) dollars.

Lender’s Name, Signature, and Date

Borrower’s Name, Signature, and Date

Example Contract to Loan Money to Friend – Interest Charged

If you are looking to borrow money from your parents or friends, you might want to include a contract which charges interest.  Since the lender will give up any interest they would have earned on their money, it is fair to assume the borrower should repay some of that.  In this sample, we will assume an interest rate of 5%.  There are plenty of loan calculators out there, which will make quick and easy work of determining payments.

On (today’s date and year) I, (name of lender) am borrowing (name of borrower) the sum of $500 (five hundred dollars).  Payment has been made to the borrower in the form of (cash, check, money order) on today’s date.

The rate of interest for this loan is 6% (six percent).  Payments will be made over the next 12 months, beginning (first of the month following today’s date, or a different date you both agree to).  Each payment shall be made in the amount of $43.03 (forty three dollars and three cents) until the balance is paid in full.

A late payment penalty of $10 (ten dollars) will be added to any payment made on or after the 11th day of the month due. 

Borrower’s Name, Date, Signature

Lender’s Name, Date, Signature

Example Promise to Pay Back Money – Lump Sum

There are times when a person just needs to borrow some cash for a short amount of time, but will make the payment in full at a specified time.  This is common as people are waiting for tax returns and things of that nature.  The sample given will work for such an instance.

On (the date with year) I, (lender’s name) agree to borrow (borrower’s name) the sum of (add number and spell it out) dollars.  Payment was given to (recipient’s name) in the form of (check, money order, cash) on this date.

(Recipient’s Name) agrees to pay back the entire sum on or before (date due).  No interest will be charged on this loan.

Borrower’s Name, Address, Signature

Lender’s Name, Address, Signature

Additional Safeguards When Lending Money to Others

There are lots of things you need to do when you are considering lending money to a friend or family member.  While contracts might seem a little extreme to some, many families and friendships have been ruined from such arrangements.   By clearly stating the terms, there is no room for misinterpretation.  The following items are additional safeguards that both parties might want to consider. 

Collateral:  The person receiving the money might want to put up some collateral to show good faith.  The person giving the money might want something to hold onto in order to secure payment.  This can be an important part of borrowing and it’s not something that’s new or out of the ordinary.  Most banks require collateral and few extend true signature loans these days.

Terms of Default:  Both parties might want to spell out exactly what will happen if the loan isn’t paid back in a timely manner or according to the terms.  This can go well beyond a late payment penalty and could include loss of collateral, additional penalties, and extra rates of interest.

Interest Rates:  You want to be fair to both parties when you look at interest rates.  No interest personal loan aren’t something that can generally be attained unless borrowing from friend or family, so the lender is certainly entitled to some form of compensation.  Both parties should mutually agree to a fair interest rate for both.

Witnesses:  You might want to include a section for someone to witness the letter to borrow money from friends or family members as it’s being signed.  This is more of a legal safeguard than anything else, but is something to consider.  If you have any reason to believe you might have issues with getting your money back, this is something you might want to explore carefully.

Notarized:  This will provide legal safeguard in a similar fashion to having a witness sign the document.  Keep in mind that you must both sign the document in front of the notary public and a small fee might be required for this service.

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Comments

Mar 12, 2012 3:33am
DeepBlue
Great article, thank you. I've always believed in a written contract no matter who the involved parties are, even more so when it comes to family and friends.
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