Never lend anyone money unless you get it in writing. Under the statutes of fraud, oral promises are quite often unenforceable. That means that if you have lent a large amount (over $600 in some jurisdictions, but this varies by state) of if the promise could not have been performed in a year, then your loan is not enforceable in a court of law.
What Is A Note?
A promissory note is a promise, in writing, to pay a specified sum of money at a certain time, or on demand, to a person named in the note. More commonly referred to as a "note" this is what some people call an IOU. It is a written promise made by one person or entity to pay another person or entity, or the bearer, a set amount of money or even an article of value. The note must be signed by the person owing the money. If it makes you feel better, by all means have it notarized, but this is not an absolute requirement in most personal loan scenarios.
Make The Loan Favor The Lender - You.
If you end up in court chasing the borrower, mosts courts in most circumstances will not award interest, attorneys fees or costs of collection unless these are in the note. Simple. State that interest will accrue at an annual interest rate of X percent. Further, should collection be required, the lender is entitled to an award and payment of all reasonable attorney fees and costs required in order to collect. You've got to put that word "reasonable" in there. Courts generally are not going to approve a $1,000.00 per hour attorney who spent a zillion hours collecting a debt. Also, costs include things like the court filing fee and the cost of sending the sheriff to serve the court papers.
Lending Money To Start A Business
It's beyond me but sometimes people will advance personal loans to someone starting a business. Have a business attorney draft the note. At the very least you need to secure the business loan. Security means that you can take something of value if the note goes into default. Under the Uniform Commercial Code you can secure inventory and equipment by following a procedure and recording simple UCC documents. It is also not uncommon at all in a commercial loan to secure the loan with equity in the person's home, or even a vacation home.
Never Lend Money On Oral Promises
Everything relevant to the loan must be in writing in the signed promissory note. This represents the full agreement. If the borrower is promising to pay you back in monthly or other time-based installments, this must be in writing in the note. Never agree that there was a wink and a nod that if Uncle Benny died and left the other person money you would not collect.
A default is a failure or an omission of something which ought to be done. So, define this in the note. "Failure to pay on _____ shall be a default", or "Failure to make any monthly payment more than 3 days after the date on which it is due shall be a default" or "Failure to pay upon written demand shall be a default".
When Things Go Wrong
When the borrower defaults, make a written demand, sending it by certified mail and also first class mail in case they decide to be cute and not sign for the certified. You can also send a demand by email with a receipt required or by mail with tracking, which does not require a signature. Demand payment no later than 14 days or 30 days after the date of the correspondence, failing that, their non payment will leave you no alternative other than to initiate litigation to collect. Then, follow through.
One More Idea
If you have ever purchased a house, find the note that you signed and read it. This is good for a few giggles. The manner in which the lender protected its own interest and provided for its own security and made it one sided is classic. But, this is life in the money lending business.
Money Is Money And Friends/Relatives Are Friends/Relatives
You are not a bank. There are banks out there that lend money. More times than I care to remember I have seen clients upset about how a money lending arrangement has ended a friendship or a good relationship with a family member. Think hard about whether you want to lend money at all, if so, draft a simple note along the lines suggested here. There are reasons that banks put people through hoops before they lend money and there are reasons that lending institutions protect themselves. Without writing a 14 page fine print legal document, I highly reccomend that you protect yourself.
I Don't Want To Collect Your Bad Loan
"Oh he's just a lawyer trying to generate some income", I can just hear some saying. No, the purpose of this guide is to help you create an enforceable loan document. I'd almost rather go have root canal than do a collection. But, at least, if you have a valid signed writing, you will have something collect upon and you won't be doing a song and a dance before a small claims court judge with 100 other files and little time to find a reason to enforce an unwritten obligation. Good luck!
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