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Promissory Loans

Promissory loans are usually made to family and friends.  If you decide to borrow money from family or friend you may feel that your word or handshake is good enough.  However, the person lending the money should require that you sign a promissory note to ensure the money is paid back should problems arise.  

On the flip side, if you want to borrow money from family or friend, it’s a good idea to offer signing a promissory note which gives a good indication that you are serious about paying back the loan.

A promissory note is a document that will serve as evidence should disagreements arise or memories fade about the debt, interest rate (if any) and terms of the loan to be repaid.

Advantages and Disadvantages


The advantages of borrowing money from family or friend may include:
  • You can get the money quickly.  There is no application to complete or credit check required.
  • The loan terms maybe lenient.  You may not have to pay it back in a specific time frame.
  • The loans most likely will have very low to no interest rate.
However there are several disadvantages with promissory loans which include:
  • May ruin relationship with the person if loan isn’t paid back as agreed upon.
  • If you don’t pay back the loan, the person may sue you.
  • You may be embarrassed to tell the person of your financial problem.
  • The person may share your problems with other family or friends who you don’t want to know.
Avoiding Problems

If you decide to seek a promissory loan from family or friend be open to the risk involved with you getting the loan.  Be sure to communicate the worst case scenario which may cause you to not pay back the loan or be late in paying back the loan.  

Also be prepared to explain why you can’t get a loan using other sources.  If you were turned down by other sources be open and tell them.  Also emphasize to the family or friend you a requesting the loan from to not lend you money then cannot afford to lose.

Relationships are at stake if problems arise so be very careful.  A small loan may not be worth ruining your relationship.  Be sure that you can meet the terms of the promissory note.  If your family or friend request you pay the loan back in 3 months and you know it’s impossible for you to do so, do not agree with those terms.  Be honest and tell them the true terms you can meet.

If you get the loan and realize there will be problems repaying the loan, notify the family or friend immediately to explain the problem.  Do not wait until you are late paying the note to notify them.   Don’t wait for them to call you.  Be proactive and call them first.  This will help with reassuring them that you still intend on paying back the loan.

Promissory Note (Loan Agreement) Example


Below is an example of loan agreement:
This loan agreement (this “Agreement”) dated this 10th day of January, 20XX between:

John Doe of 999 Loan Street, Englewood, NJ, 07631 (the “Lender)

And

Mary Jane of 2122 Borrower Street, Englewood, NJ, 07631 (the “Borrower”)

In consideration of the lender loaning certain monies (the “Loan”) to the borrower, and the Borrowing repaying the Loan to the Lender, both parties agree to keep, perform and fulfill the promises and conditions set out in this Agreement.

The Lender promises to loan one thousand ($1,000 USD), to the borrower and the Borrower promises to repay the principle amount to the Lender on March 1, 20XX, without interest.
Both parties will then sign the document.  It is also a good idea to have a 3rd party sign the document as a witness.

 

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Comments

I never really thought about promissory loans from family and friends. Good idea!

 

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