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How to Document a Personal Loan

Borrowing money from a friend or loaning money to a family member can be a somewhat uncomfortable event should things not go as planned. Because of this, asking to borrow money from or loaning money to someone who is a close friend or relative is not an easy decision for many people to make.

To make matters worse, many people feel obligated to loan money to close friends and family even though their better judgment might be against the idea simply because they do not want to be the cause of hard feelings. However, there are steps that can be taken by a borrower or a lender to alleviate some of the awkwardness of this situation and maintain the relationship at the same time.

Formalizing the Loan

The best way to make a personal loan easier on the borrower and the lender is to make sure to treat the entire process as a formal business arrangement. For many friends and relatives, a handshake and a promise are good enough for a personal loan, but disagreements often arise when the original promises are forgotten.

The best method to ensure that this does not happen is to execute a formal loan agreement or promissory note that documents all of the important terms. Both of these documents are used for the same purpose; they both evidence a debt owed by a borrower to a lender. However, in practice a promissory note is generally not as detailed as a loan agreement. A loan agreement includes additional details regarding the promises and obligations of the parties as well the ability to include a guarantor as co-signer. Both agreement allow you to specify property as collateral for the loan.

Ensure a Formal Financial Arrangement

A legal loan agreement or promissory note signed by the two parties is a great way to remove the transaction from the level of friendship and place it in a formal context. This can help reassure the friend loaning the money that the borrower is serious about repaying the note and considers the loan to be a serious debt. This can make the difference when someone is asking for money from a friend or family member because a formal contract lets the lender know that this is not just a handshake and a promise and that the borrower fully intends to repay the debt.

If permitted in our county, you may also consider recording the agreement at the county recorder’s office to ensure there is a formal copy on record. By properly documenting and recording a personal loan, close friends and relatives can protect their relationship from any issues that might arise during the course of repayment of the loan.

When both parties understand that legal ramifications will ensue if the agreement is breached by either party, it puts the burden on the law rather than the relationship and can help minimize any problems that might occur.

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