Loaning money to family and friends can be a delicate subject. You don't want to be too formal with the terms of the loan. Yet, if you don't write a proper loan note or a legally binding IOU, you could be kissing your money goodbye.
It's generally a good idea to protect yourself by putting the terms of the loan in writing. If your friend or relative protests, you could say that there are tax consequences and you'll need the note to keep the IRS off your back.
Here's what you need to know about writing a legally binding IOU or loan note:
What Needs to Be Included in an IOU
Writing a legally binding IOU is remarkably simple, leaving you with no excuse for not having a loan note.
First, the note should identify, and be signed by, the borrower.
Other than that, there are really only three very basic things that need to be in promissory notes, and keeping it simple can help alleviate any fears that friends or family may have about signing the note. The three things to include in promissory notes are:
- The amount of the loan. This is pretty straightforward. You want to state exactly how much you loaned to the other party.
- How and when the loan will be repaid. You may require that the loan be repaid in a lump sum or in incremental amounts over time. You could also specify that payments are due every month, at the end of the year, or any other time period.
- Any interest charged. It may feel wrong to even consider charging family or friends interest, but if you don't, you're essentially giving them a gift. If you do charge interest, just make sure you don't charge an unreasonable rate. Generally, rates over 15% to 20% are not allowed, but hopefully you aren't charging your family and friends that much anyway.
Need More Help?
For complex loans such as those involving collateral or substantial amounts of money, you may want an expert set of eyes to review the terms of your loan. An experienced contracts lawyer can help to ensure your loan note is legally binding and, if needed, can also help you enforce the terms of your IOU.
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