How to safely lend money

If you plan to lend money to a family member or friend, it’s in the best interest of both parties to have a clear, legally binding loan agreement. Here’s how to go about it.

Drawing up a loan agreement yourself
If you’re loaning a small sum of money, you may choose to draft your own loan agreement. In addition to the loan amount, this contract should include the following:

• The full name, address, and phone number of both the lender and borrower

• The loan repayment schedule and whether the amount will be returned in a lump sum or in multiple payments

• The interest rate on the loan, if applicable

• The terms for late or missed payments

• The signature of both parties, the date and, ideally, a witness’ signature

The loan agreement should be written in plain language. If you aren’t confident about drafting the document yourself, consider looking for a template of a loan agreement online.

Getting help from a lawyer
Drafting a loan agreement carries certain risks. If important information is left out, or if either party’s obligations are unclear, the agreement may not be legally valid. Alternatively, you may unwittingly agree to adverse terms simply because you aren’t familiar with contract law. If you want extra assurance, or if you’re loaning a large sum of money, always have a lawyer draw up your loan agreement.

A lawyer can be counted on to create a comprehensive, airtight contract. In addition, they can provide legal advice about how to handle the more delicate aspects of the loan, such as the procedure for handling missed payments.

By entrusting a lawyer to draft your loan agreement, you may spare yourself some frustration if a dispute arises.