How do I write a simple personal loan agreement?

When facing emergency expenses that you can’t afford to cover on your own, you have several options you can look into for a solution. Without an emergency fund available, borrowing money to cover those unexpected expenses and paying back later might be necessary to get through this hard time. Personal loans and credit cards are widely available and relied upon for covering last-minute costs, but they can be expensive when you add up all the fees and interest charges.

To avoid the cost of borrowing money from a lender or a credit card company, some people choose to ask a family member or friend to lend them money. This can be nerve-wracking because mixing finances into personal relationships can bring about tension and communication issues. When borrowing money from friends or family, most financial experts will advise you to talk about everything beforehand and get it all in writing. Creating your own simple personal loan agreement can help you make sure that things go smoothly with your loved one while still allowing you to save a ton of money in interest.

Writing up a simple personal loan agreement when borrowing money from family or friends is pretty straightforward as long as you remember to include important details you might need to refer back to. Here is a general list of information you will want to include in your own loan agreement: 

  • The full names and addresses of both the lender and the borrower. 
  • The exact amount of money borrowed.
  • The date that the loan was given and the expected date for repayment.
  • Interest rate and/or annual percentage rate, if applicable. 
  • Details of the payment terms, including the dates and amounts of installments.
  • Options for changes in the terms of the loan and how potential issues or disputes will be resolved.
  • Signatures from both the lender and the borrower with the date of the signing.

You might think all these details are overboard for a loan between friends or family. But it is always better to be over-prepared because you never know what could go wrong along the way. Financial advisors also suggest that the borrower should always insist on an interest rate even if the lender says it is not necessary. Offer to pay them the equivalent of interest they would accrue if they put the money into a high-yield savings account. By doing this, everyone benefits from the arrangement as the APR on a savings account is still significantly lower than you’d pay on a personal loan from a bank or credit union.

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