Many people do not realize that a no interest loan rarely can be granted. The reason is that the IRS looks as a loan with no interest as a "gift" and that may trigger gift tax upon the lender, a very unfortunate and unintended result. So sometimes it simply makes sense to charge a minimal amount of interest and allow for early prepayment. If anything the threat of interest deters the borrower from being late or delinquent on repayment.



Though many of us do not want to entertain the possibility that the money may not be returned, having the Note specify what actually is a "default" will prevent you from having to "prove" that there is a problem. Common default provisions are bankruptcy by the borrower, multiple late payments, payments past a certain date, trying to sell the Note, etc.


Acceleration and Penalty Clauses

A solid Note should always provide for Penalties and repercussions for a Default. These include acceleration, which means that the balance of the loan can be made due immediately, even if the due ("maturity") date was originally set in the future.



If the goal is to simply get the money returned as soon as possible, then it may make sense to have a clause that expressly allows for prepayment of the Note in whole or in part upon some period of notice or without.


Choice of Law and Forum

One of the most critical tools to enforce and collect on a Note is knowing where a lawsuit will take place. Not specifying a choice of law and a venue for an enforcement action to take place can be devastating in the event that you need to collect on an outstanding debt. For example, if you loan money to someone in the neighboring state, you might be forced to sue them there which might simply be practically impossible.


Personal Guarantee

If you make a loan to business entity such as a corporation or LLC, you usually do not have any recourse against the principals of the entity in the case of a default. In other words, if the business defaults there is no one else to go after for the money. A personal guarantee ("PG") is an addendum to the Note. The PG is signed by the entity principals and obligates them to pay the remaining debt in the event the business entity default and is often overlooked.