Many people seek loans from friends and family when buying large assets or starting a business. Loaning to family and friends is a high-risk job. Except for the satisfaction of helping people you know, the lender has almost no benefit. When it comes to borrowing money, or even borrowing money from family and friends, you will hear a common saying “write it down” over and over again.

There are good reasons for obtaining a loan agreement, sometimes called a loan agreement promissory note, In writing, but you may have other questions about borrowing money from people you know. Here are some common questions and answers about borrowing money from family and friends.

Is it legal to borrow money?

Yes it is. Borrowing money is legal, and when you do this, the debt becomes a legal obligation for the borrower to repay.If the borrower defaults, you can take legal action against the borrower Small claims courtThis may seem harsh, but it is important to know it beforehand. Loans between relatives have the same legal effect as bank loans.

If you lend money to a friend or family member, you may need to obtain detailed information in writing and be signed by all parties to prevent conflict or misunderstanding. If all you have is verbal understanding and handshake, it may not be enough to prove the details of your agreement. A signed written contract is far better than a handshake.

Can I lend money to friends and charge interest?

Yes, you can, but the tax consequences can be tricky and complicated. If you keep it as an interest-bearing account, you will accrue interest on the money, which is a good reason to charge interest. However, if the temporary lender unwisely arranges the loan, obtains all the details in writing, and asks the lender and the recipient to sign a written agreement, then they may unknowingly put themselves into tax difficulties. Consult a lawyer If you want to make a loan agreement to avoid costly mistakes in the future.

Should I avoid borrowing money due to potential legal conflicts?

It all depends. Consider your financial situation and goals:

• Can you afford the money?
• If other lenders reject the borrower, do you really have to take the risk? What if the borrower encounters unexpected challenges?
• If a breach of contract occurs, are you and your other family members ready to take legal action?
• Are you ready to forgive the borrower’s debt to maintain peace?

If losing this money would cause you serious economic losses, then you will most likely decide to say this and avoid the loan.If you move on, you may need to set the terms in writing promissory note, The two parties can reach an agreement and stick to it.

How can I ensure that I will be rewarded?

Although there are few guarantees in life, here are some tips that may increase your chances of getting a full refund.

Tip 1: Write the terms in writing.

You can use a legally binding and easy-to-fill loan agreement called promissory note, To get detailed information about the loan. Of course, verbal promises between friends are easier and gentler, but when one or both parties cannot recall these terms in the next year or two, trouble comes. The written agreement avoids future uncomfortable debates.

Tip 2: List all key loan agreement terms.

Consider including:

• The names and addresses of the parties to the agreement
• Loan amount (principal)
• interest rate
• Repayment conditions, including any late fees or fines
• Signature line

The terms of repayment may depend on the circumstances of both parties. For example, smaller payments twice a month may be more effective for borrowers. Or, if the borrower expects major financial incentives such as tax rebates, a one-off repayment may make sense. In any case, you may want to specify the deadline clearly.

You can also specify the collateral for the loan and, where applicable, that the loan obligation can be transferred to a third party.

Tip 3: If the borrower defaults, please state your right of recourse.

If the borrower defaults or fails to pay the amount owed, you can:

• Modify the terms of the agreement to deal with changes in circumstances
• Take collateral, if any, to secure the loan
• Go to the Small Claims Court to get a verdict

Final points to consider

Lawyer with rocket promissory note, You can cover legal basics, including loan amounts, repayments, and default clauses.

If you have trouble collecting repayment, please check These tips for collecting personal debtYou may need a lawyer to renegotiate loan terms, recover part of the debt in a settlement agreement, or help the borrower obtain a debt consolidation loan.

Need advice on specific cases? Consult a lawyer If your situation requires affordable high-quality legal services.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm, nor is it a substitute for a lawyer or a law firm. The law is complex and changes frequently.For legal advice, please Ask a lawyer.