From Debt Into Retirement

A personal loan agreement is a legal document explaining the details of a consumer, business or individual loan. The document will include information about the loan terms, as well as representations, and warranties of the borrower. Personal loan agreements can be drawn up in various situations including the purchase and financing of a vehicle, jewelry or other valuable assets. The lender can be an individual but is more often a financial institution. Banking institutions have their own special legal documents, often referred to as a promissory note, and are a requirement of the terms and conditions of your contract. If you are an individual selling an item, or lending money to a friend or family member, it is recommended to have your own contract drawn up in the event default.

Lending money to an acquaintance can be a risky venture as mixing business with a personal relationship can cause a huge rift in the event that the money owed to you is not paid back. Like any other loan, family loans work best if properly documented. This documentation means signed promissory notes including the signature of the lender, the borrower and the date. While some have a basic handwritten contract, there are personal loan agreement forms available for free online that have been drawn out in legal terms. An agreement, which spells out the expectations of the borrower and lender in specific terms, will prevent any confusion in the future. The details of amortization schedules, collateral and action if the borrower defaults on payment, will be spelled out to both parties. A signature on these documents will show that both parties acknowledge the agreement at hand.

A written acknowledgment or agreement is far more official than a verbal agreement that can be difficult to prove in civil court. While neither party will actually forget the terms of the agreement, there is less room for misconceptions and emotional disagreements when your contract is written on paper. If you are the lender, you may be thinking: I have never had a problem with my nephew and he is a reliable person. Unfortunately, money changes people and relationships, and sadly, when people are unable or unwilling to pay back a loan, things can get very unusual.

To avoid losing out on your money and give the borrower an incentive to pay, many financial experts suggest doing a secured family loan. With secured family loans, you as the lender will be allowed to take possession of a stated item in the event that the borrower does not pay. This is very similar to a secured loan by the title of a car or boat; however, in most circumstances the stakes will not be as high. The personal loan agreement will specify what the collateral is for this secured loan, and at what point the lender may take possession of the collateral. This is best for every party involved, as there is less risk associated with the personal loan.

Like any other financial investment, personal loan agreements are subject to taxable income. For the lender, depending on the amount financed and the interest earned, it may be required to report the loan on your tax return. The borrower may also want to disclose the loan to the IRS as interest paid therefore reducing their taxable income. Having a personal loan agreement established will be the documentation the IRS will need to prove interest-paid and earned.

Although family loans can be the wrong choice in some situations, if they are properly documented it can prevent confusion and frustration for both the lender and the borrower. It is important for borrowers to rule out alternative methods before turning to their family for a loan. If bank will not lend to them, you can become a lender as long as you are willing to take on the risk associated with lending to a risky borrower.