How to write a loan agreement between friends

If you must borrow money from a friend , it’s best to put your friendship aside and simply think of it as a business deal among friends and draft a personal loan agreement letter with all the details that surround the transaction.

In other words, it must be clearly represented as a legal loan agreement letter. It will make the agreement more serious overall.

Legal Protection

The letter is intended to protect both parties entering into the agreement. It’s best to have legal proof of who borrowed the money, when they borrowed it, and the exact terms for paying it back.

Legal proof of all the details involved will protect the bank accounts of either party as well as the friendship.

It’s also a good idea to have the letter signed in front of a notary, even if it costs a little money in most circumstances.

If this isn’t possible, have witnesses sign the letter at the very least. It’s also critical that both parties have a copy of the contract.

How to write a loan agreement between friends

If you want to keep your relationship intact, follow these steps to ensure that everything goes as planned and the loan is paid back as intended.

1. Clearly Identify Both Parties As Well As The Details Of The Loan

The first paragraph should clearly identify the name of the lender and borrower along with the amount of money loaned and the date when the loan was originally made. For example, Darci Barton loaned Sandy Smith the amount of $2,500 on March 1, 2020.

2. Include The Loan’s Interest Rate

Agree upon an interest rate regarding the loan as well as the exact method you intend to use in order to calculate the interest of the loan.

Alternatively, if both parties agree there will be no interest charged, be sure to include that in the terms of the loan as well.

3. Outline The Repayment Terms Of The Loan

Clearly outline the loan’s repayment terms in detail. Often, these kinds of loans are repaid immediately after the borrower receives a significant lump sum of money following a financial event, such as a lawsuit settlement or tax refund.

If this is the case, be sure to include those specific details concerning the exact event that will trigger the due date.

On the other hand, if payments will be made for repaying the loan, include a detailed description of the repayment schedule, including the beginning date and final payment date as well as the amount of each payment.

4. Officially sign and date the agreement

Both parties need to sign and date the formal document along with a third-party witness if possible.

The witness doesn’t have to be a friend or family member. In fact, they should preferably NOT have a relationship with either party.

For instance, an employee at your local bank is an excellent choice to use as a third-party witness since they have zero vested interest in how the loan is collected or in the loan itself. There’s also the option to have it notarized by an official notary public as well.

Sample 1 – Personal Loan Agreement Letter Between Friends

Sarah Brown (borrower)
Tammy Smith (lender)
Original Loan Date: March 25, 2019
Entire Repayment Due: March 25, 2021
Total Amount of Loan: $2,500


I, Sarah Brown, borrowed $2,500 from Tammy Smith on March 25, 2019. Tammy Smith and I both agree that the loan will be repaid using a series of scheduled financial payments.

I, Sarah Brown, will submit a monthly payment due on the 1st of every month using a personal check in the amount of $104.20 to Tammy Smith. The first payment will be made on April 25, 2019 and the last payment will be made on March 25, 2021.

I, Sarah Brown, agree to a $5 late charge per day for any payments that are late until the entire loan is paid in full on March 25, 2021.

Both parties agree to the terms surrounding the said loan.

Signed and dated today on March 25, 2019.

(Sarah Brown’s signature)
Sarah Brown

(Tammy Smith’s signature)
Tammy Smith

Sarah Brown
2130 Lucky Rd.
Dixon, MD 20009
[email protected]
(454) 815-8444

Tammy Smith
1908 Morris Rd.
Dixon, MD 20008
[email protected]
(454) 805-7523

Mary Benson (third-party witness)
Trust and Loan Bank representative
428 South Ave.
Dixon, MD 20007
(604) 895-4147

Sample 2 – Personal Loan Agreement Letter Between Friends

Andrew Jones (borrower)
Ben Bradley (lender)
Original Loan Date: April 2, 2019
Entire Repayment Due: May 2, 2019
Total Amount of Loan: $2,500


I, Andrew Jones, borrowed $2,500 from Ben Bradley on April 2, 2019. I will repay the loan in one lump sum when I receive my income tax refund

I, Andrew Jones, promise to repay Ben Bradley the entire amount of $2,500, using a personal check on May 2, 2019.

I also agree to pay a $5 late fee per day if I fail to make the agreed upon one lump payment on May 2, 2019.

(Andrew Jones’ Signature)
Andrew Jones
(Ben Bradley’s Signature)
Ben Bradley

Andrew Jones
3100 Dusty Rd.
New Brunswick, NJ 64856
[email protected]
(954) 895-8744

Ben Bradley
1558 Johnson Rd.
New Brunswick, NJ 64856
[email protected]
(354) 895-7823

Sample 3 – Personal Loan Agreement Letter Between Friends

Full, legal name of Payee
Full, legal name of Promisor
Loan Date
Total Amount of Loan
Final Due Date for Repayment

I, Payee Name (“Payee”), borrowed $1,000 from Promisor Name (“Promisor”) on Loan Date. By signing this agreement both Payee and Promisor acknowledge that Payee will pay back Promisor using the following payment schedule.

Payee agrees to repay Promisor with a personal check for $100 on the first of each month for 10 months beginning with January 1, 20__. The last payment will be made October 1, 20__, at which time the loan will be fully repaid.

Payee further agrees to pay a $35 per week late charge for every week that payment is delayed after the first of the month.

This $35 late charge may be prorated as a $5 per day charge for each day that the payment is late for segments of time shorter than seven days.

Both Payee and Promisor agree to the payment agreement defined above.

Signature of Payee with Date
Signature of Promisor with Date

Friends and family loans may be available when other types of finance aren’t, but they do require some precautions.

Friends and family loans can work

Without the good old family loan we wouldn’t have companies such as Walmart, Motown Records, GoPro, or Amazon. And without a loan from Mrs Dyson, her husband would never have had the funds to develop his first cyclonic vacuum cleaner in the late 1970s.

Pros and cons of family and friends loans

How to borrow responsibly from family and friends

There’s nothing wrong with starting a business with a family loan or one from a friend. No one knows you better. Plus they’ll often give you better, more flexible lending terms. For instance, they may not require any security, they won’t charge you an application fee, their interest rates might be lower (or zero!), and they might let you skip a couple of payments.

But there are some guidelines you should follow to prevent turning those friends into courtroom litigants, or being cut out of the will.

Pitch as you would to a bank or investor

Keep it professional but friendly. Show them why it’s a good idea to lend you money for your business.

  • Don’t expect them to stump up every cent – explain what you’re putting in and what you’ll be taking out
  • Be clear with them about how much you need and why
  • Take them through your budget so they can see you intend to spend their money wisely
  • Be open and transparent, and manage their expectations – explain the risks and show them best and worst case scenarios
  • Make sure they understand they can’t get their money back quickly if a family emergency comes up
  • Show them how and when you plan to repay them

Loan, investment, or gift?

This can be one of the biggest misunderstandings when taking money from family or friends. Make sure all parties know what the situation is – especially other family members who might think you’re about to blow their inheritance on a pipe dream.

  • Investment vs loan: A loan might be better if you don’t want your friend or family member telling you what to do. Learn more about the difference between an investment in your business and a loan in the chapter on debt vs equity finance .
  • Loan vs gift: If you’re not paying interest or making repayments, the tax office could hit the person lending you the money with tax or penalties. Be aware of the rules.

Put it in writing

Create a formal record of the agreement. It will help you avoid misunderstandings at the outset, and it can be used to resolve disputes.

If it’s a loan, document the following:

  • the amount borrowed
  • the interest rate (if applicable)
  • the length of the loan including start date and final repayment date
  • repayment terms – regular amounts or a lump sum when the business reaches a certain stage; whether early repayment is okay
  • security (if applicable)
  • penalties for late or non-payment – for example, increasing the interest rate, changing the loan terms, adding extra costs to the loan, taking of security, or instigating court action

For extra peace of mind, get a lawyer or accountant to take a look. To help get you started, check out our loan agreement template below.

If it’s an investment, the agreement will be far more complex. The document will need to say how many shares the investor gets and whether or not they have a say in business decisions. It should also explain if they’re going to be held responsible for business debts or lawsuits. Definitely get a lawyer and accountant involved in writing one of these.

Always follow through

Do what you said you’ll do. And give the lender a heads-up if things aren’t going the way you hoped. You don’t want them hearing from third cousin Bob.

  • Make your repayments on time. If they can see the money coming back to them they won’t begrudge it when they see you spending some money on yourself.
  • Give them a report at year end – how the business is doing, how much you’ve repaid, any obstacles you might be facing.
  • Be professional and treat them with respect. A successful relationship with a friend-or-family lender can be good evidence to put in front of a professional lender further down the track.

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

How to finance your business

Need finance for your business? Learn about the types of finance, approaching lenders and investors and more.

Your new business idea is ready to go. Now you need to find the right small business funding. But where do you start?

Knowing how much money you need will help you choose the right type of finance. These tips will help you find a number.

Most forms of funding fall into one of two camps. Let’s look at the main pros and cons of debt versus equity.

It takes money to make money. So what sort of finance options are there? Here are the types that fund most businesses.

Getting a business loan is still one of the most common ways to finance a business. So let’s look at how to get one.

Peer-to-peer lending is an alternative method of getting a business loan. How does it work?

Friends and family loans may be available when other types of finance aren’t, but they do require some precautions.

Ever thought your cash flow would be better if everyone just paid what they owed you? Well, you may not have to wait.

How do you find investors for equity financing? Let’s look at what types there are and where to locate them.

Angel investors and venture capitalists are alternative finance sources. What can they offer your business?

Crowdfunding can get you money to build a business, and the attention to build a customer base.

Grants are a great funding option for some businesses. They can be a lot of work to get, but the reward is free money.

Seeking business funding is a major step but you needn’t be daunted. Here’s how to pitch your business.

Now that you’re in business, you want to stay there. Xero’s got resources and solutions to help.

To allow for equitable access to all users, SEC reserves the right to limit requests originating from undeclared automated tools. Your request has been identified as part of a network of automated tools outside of the acceptable policy and will be managed until action is taken to declare your traffic.

Please declare your traffic by updating your user agent to include company specific information.

For best practices on efficiently downloading information from, including the latest EDGAR filings, visit You can also sign up for email updates on the SEC open data program, including best practices that make it more efficient to download data, and enhancements that may impact scripted downloading processes. For more information, contact [email protected]

For more information, please see the SEC’s Web Site Privacy and Security Policy. Thank you for your interest in the U.S. Securities and Exchange Commission.

Reference ID: 0.c5a0317.1649915242.72fd0e5

More Information

Internet Security Policy

By using this site, you are agreeing to security monitoring and auditing. For security purposes, and to ensure that the public service remains available to users, this government computer system employs programs to monitor network traffic to identify unauthorized attempts to upload or change information or to otherwise cause damage, including attempts to deny service to users.

Unauthorized attempts to upload information and/or change information on any portion of this site are strictly prohibited and are subject to prosecution under the Computer Fraud and Abuse Act of 1986 and the National Information Infrastructure Protection Act of 1996 (see Title 18 U.S.C. §§ 1001 and 1030).

To ensure our website performs well for all users, the SEC monitors the frequency of requests for content to ensure automated searches do not impact the ability of others to access content. We reserve the right to block IP addresses that submit excessive requests. Current guidelines limit users to a total of no more than 10 requests per second, regardless of the number of machines used to submit requests.

If a user or application submits more than 10 requests per second, further requests from the IP address(es) may be limited for a brief period. Once the rate of requests has dropped below the threshold for 10 minutes, the user may resume accessing content on This SEC practice is designed to limit excessive automated searches on and is not intended or expected to impact individuals browsing the website.

Note that this policy may change as the SEC manages to ensure that the website performs efficiently and remains available to all users.

Note: We do not offer technical support for developing or debugging scripted downloading processes.

How to write a loan agreement between friends How to write a loan agreement between friends

This Loan Agreement (the “Agreement”) is entered into ____________________ (the “Effective Date”), by and between ________________________, with an address of _____________________________ (the “Lender”) and _________________, with an address of _______________________________, (the “Borrower”), individually referred to as “Party”, and collectively “the Parties.”

WHEREAS, the Borrower desires to borrow a fixed amount of money; and

WHEREAS, The Lender agrees to lend a fixed amount of money;

IN CONSIDERATION of, the mutual promises, covenants, and conditions contained herein, the Parties agree as follows:

Loan Amount. The Parties agree the Lender will loan the Borrower $_____________________ (the “Loan”).

Interest Rate. The Parties agree the Interest Rate for this loan shall be ____% to be accrued monthly.

Loan Term. This Loan shall be for a period of ____ years/months.

Repayment. The Parties agree the Borrower shall pay the Lender $_________ per month on the ___ day of each month. Payment shall be applied as follows:

Principal Loan Amount $_________

Late Payments. Payment shall be considered late if received by the Lender ___ days after its due date. The Lender will have the option to charge a late fee of _____%.

Default. If the Borrower defaults on its payments and fails to cure said default within a reasonable amount of time, the Lender will have the option to declare the entire remaining amount of principal and any accrued interest immediately due and payable.

Prepayment. The Borrower will not be penalized for early payment.

Representations and Warranties. Both Parties represent that they are fully authorized to enter into this Agreement. The performance and obligations of either Party will not violate or infringe upon the rights of any third party or violate any other agreement between the Parties, individually, and any other person, organization, or business or any law or governmental regulation.

Severability. In the event any provision of this Agreement is deemed invalid or unenforceable, in whole or in part, that part shall be severed from the remainder of the Agreement and all other provisions shall continue in full force and effect as valid and enforceable.

Waiver. The failure by either party to exercise any right, power, or privilege under the terms of this Agreement will not be construed as a waiver of any subsequent or future exercise of that right, power, or privilege or the exercise of any other right, power, or privilege.

Legal Fees. In the event of a dispute resulting in legal action, the successful Party will be entitled to its legal fees, including, but not limited to its attorneys’ fees.

Legal and Binding Agreement. This Agreement is legal and binding between the Parties as stated above. This Agreement may be entered into and is legal and binding both in the United States and throughout Europe. The Parties each represent that they have the authority to enter into this Agreement.

Governing Law and Jurisdiction. The Parties agree that this Agreement shall be governed by the State and/or Country in which both Parties reside/do business. In the event that the Parties reside/do business in different States and/or Countries, this Agreement shall be governed by ______________ law.

Entire Agreement. The Parties acknowledge and agree that this Agreement represents the entire agreement between the Parties. In the event that the Parties desire to change, add, or otherwise modify any terms, they shall do so in writing to be signed by both parties.

[ Remainder of this page intentionally left blank. Signature page follows. ]

The Parties agree to the terms and conditions set forth above as demonstrated by their signatures as follows:

Today’s low-interest-rate environment makes it easy to loan money to family members on favorable terms with full IRS approval. Here’s a rundown of what the law covers and why now might be a good time to set up loans.

Nothing in the tax law prevents you from making loans to family members (or unrelated people for that matter). However, unless you charge what the IRS considers an “adequate” interest rate, the so-called below-market loan rules come into play.

For instance, let’s say you loan $50,000 interest-free to your daughter so she can buy her first home. Under the below-market loan rules, this can have unexpected income tax consequences for both you and your daughter, as well as gift tax consequences for you. Who needs the hassle?

The alternative is to charge an interest rate equal to the “applicable federal rate” (AFR). As long as you do that, the IRS is satisfied and you don’t have to worry about any tricky tax rules biting you. As the lender, you simply report as taxable income the interest you receive. On the other side of the deal, the borrower may be able to deduct the interest expense on his or her personal return, depending on how the loan proceeds are used.

Even better, interest rates these days are reasonable. The AFRs for October 2016:

  • 0.66% for “short-term” loans of three years or less.
  • 1.29% for “mid-term” loans of more than three years but no more than nine years.
  • 1.93% for “long-term” loans more than nine years.

AFRs are updated each month in response to ever-changing bond market conditions. So rates may not stay this low indefinitely.

For example, if you decide to lend $50,000 to your daughter, you could charge the mid-term AFR (only 1.29% in October of 2016) for a 108-month loan (nine years). She can pay that same low rate for the entire loan term with the government’s blessing. Say you want to make it a 15-year loan instead. No problem. Just charge a rate equal to the long-term AFR (1.93% in October of 2016). Your daughter can pay that same low rate for the entire 15-year loan term.

However, these rules apply to term loans. When you make a demand loan, which can be called in anytime, the AFR isn’t fixed in the month you make the deal. Instead, you must charge a floating AFR, based on fluctuating short-term AFRs. So if you believe rates are headed higher in the future, it’s best to set up a term loan (one with a specific repayment date or specific installment repayment dates). That locks in today’s low AFR for the entire duration of the loan.

With this plan, everybody should be happy. You’ll be charging an interest rate the IRS considers adequate. The borrower should be pleased with the low rate. And you’re glad to give the borrower some financial assistance without creating any tax complications.

One more thing: Under a favorable tax law loophole, you are completely exempt from the below-market loan rules if the sum total of all loans between you and the borrower adds up to $10,000 or less. (This includes all outstanding loans to that person, whether you charge adequate interest or not.) Thanks to this loophole, interest-free loans of $10,000 or less generally don’t cause any tax difficulties for either you or the borrower.

Documentation is important with family loans. If the person never pays you back, and you make a good faith attempt to collect, you’ll want to claim a non-business bad debt deduction. These write-offs are treated as short-term capital losses.

If you don’t document your loan and you’re audited, the IRS may say the family loan was a gift and disallow a bad debt deduction. And there could be problems because you didn’t file a gift tax return.

How to write a loan agreement between friends

I’m a parent and I want to financially help out my kids. What’s the best way to do that?

You may want to help your kids get into their first home faster or help them out with much needed home renovations, but giving your kids money without a formal loan agreement being in place carries real risks.

Oral agreements (or homemade written agreements with vague or uncertain terms) are unlikely to be enforceable, and in Australia the loan is presumed to be a gift if there is no loan agreement in place.

A formal loan agreement protects you and your kids. It increases the chance that you will get your money back if your child enters family law proceedings or bankruptcy.

Already lent the money? Whilst it’s best to have a loan agreement in place before you lend money, a retrospective agreement is better than nothing!

You should also consider whether you want a secured or an unsecured loan agreement, or, in other words, whether you want to put a mortgage or caveat over your kids’ property. If your kids are in a relationship or if they work in certain fields subject to a higher rate of negligence claims (eg working as a business owner or a surgeon) and you want to ensure you get your money back, a secured loan agreement is preferable if you want to rank ahead of other unsecured creditors waiting in line to be paid back.

You can also choose whether the debt can be forgiven on your death by creating a complimentary Will (which we can also help you prepare). Otherwise, the loan will remain owing to your estate.

Please note that where there is a bank also lending to your kids, some banks will want you to confirm the money is a gift rather than a loan, so involve your broker in this conversation if you want to protect your contribution with a loan agreement.

Not using a written agreement can result in confusion about when the money should be repaid and with how much interest, or a loan could be mistaken as a gift, either by the borrower or other family members or friends.

A written agreement may seem too formal – especially if it is written in a legalistic style. It may prompt the borrower to question your relationship and whether you trust him or her.

This loan agreement is a simple agreement that aims to bridge the gap between not using an agreement at all, and using a longer, more comprehensive one.

When to use this agreement

This is a simple agreement. It contains no provisions for security or for a guarantor. If you need these, look at our other Loan agreement templates or see the most likely alternatives below.

However, it is a legally binding document and you can take action against the borrower if he or she doesn't pay you on time, or uses the loan for a reason not agreed.

Use this agreement when you need to record the loan, but where you have a high level of trust with the borrower.

It is suitable for situations such as:

  • lending to a friend to buy a car or other high priced item
  • lending to a child for a house deposit
  • lending to a child to fund a wedding

Either party may be abroad or in the Republic of Ireland, and the loan can be of any size.

Alternatives to this document

If you need a more comprehensive agreement, but are happy for the loan to be unsecured, see our standard Unsecured loan agreement: person to person; private or business.

The law in this document

There is little specific statutory law relating to personal lending, so you are free to agree the terms you want with the borrower. We give you options for different situations.

Drawn outside the Consumer Credit Act 1995, this agreement is not suitable for companies in the business of lending or providing credit to consumers.

The contents of the agreement

  • Definition and purpose of the loan
  • Sum of the loan and advances
  • Repayment conditions
  • Interest payable
  • Miscellaneous legal matters

This template is supported by drafting notes so that you will know whether you can safely delete some provision. It is most unlikely that you will want to add new provisions, but if you do, it is easy. Our layout and use of plain English also make it very easy to edit by deletion.

This document was written by a solicitor for Net Lawman. It complies with current Irish law.

Компания Readdle была основана в Украине, и для многих наших сотрудников эта страна стала родным домом. Прямо сейчас российские вооруженные силы бомбят и атакуют Украину на суше, в воздухе и на воде.

С начала войны тысячи мирных жителей были убиты и ранены, среди них много детей. Более 1000000 человек были вынуждены покинуть свои дома, спасаясь от ужасных военных бесчинств. Число жертв продолжает расти.

В силу этого компания Readdle предпринимает следующие меры:

  • Мы удалили все наши продукты из App Store и Google Play в России;
  • Мы больше не сотрудничаем с компаниями, которые принадлежат российским гражданам или имеют к ним отношение;
  • Мы не ведем бизнес с компаниями, которые продолжают отрицать войну в Украине, поддерживают российскую агрессию в Украине или связаны с любыми лицами, выступающими на стороне захватчика.

И хотя мы понимаем, что вы можете не разделять взгляды и убеждения российского правительства, идущего на нарушения прав человека и военные преступления, мы должны предпринять действия, направленные на поддержку борьбы Украины за свою свободу.

  • Для текущих пользователей:
    Для текущих пользователей в России доступ к установленным приложениям сохраняется, но все новые функции и обновления безопасности с нашей стороны предоставляться не будут. Кроме того, мы больше не будем обеспечивать “техническую поддержку” наших приложений пользователям из России.
  • Для новых пользователей:
    Приложения Readdle больше не будут доступны для продажи в российском App Store и Google Play. Мы не будем предлагать наши продукты и услуги пользователям в России.

Считаем, что вы заслуживаете знать правду. Поэтому мы отобрали достоверные источники, которые круглосуточно следят за событиями войны в Украине. Ниже вы можете найти список надежных СМИ, освещающих войну в Украине на русском языке:

Вы можете помочь не только словом. Есть и более действенные способы остановить войну. Здесь вы можете узнать, как помочь Украине уже сейчас. Помните, каждый ваш шаг имеет значение.

How to write a loan agreement between friends

Anyone can run into a financial crunch from time to time and need a loan to bridge the cash-flow gap. Even if the person who needs the loan is a close friend, you should always draft a loan agreement to protect yourself from problems in the future. If the friendship sours before you collect, the loan agreement serves as the legal proof you need that the money you provided was not a gift and your friend intended to repay the funds. Without a loan agreement, people can find themselves on the short end of the collection stick.

Construct the first sentence to identify yourself as the lender and your friend as the borrower. Include the amount of money you are lending and the date the loan was made. For example, “John Smith made a loan to Sally Fields on May 5, 2010, in the amount of $1,200.”

Write the interest rate for the loan into the document and the method you will use to compute interest due on the loan. If you do not intend to charge interest on the loan, make that clear in the loan agreement.

Spell out the repayment terms of the loan in detail. If your friend will repay the loan in lump sum after a financial event occurs, such as a tax refund or lawsuit settlement, make sure you include specifics on the inciting event that will trigger the loan as due. If your friend will make payments, provide a detailed description of the payment plan, including the date payments will begin, the amount of the payment due on each pay date and the date of the final payment.

Sign and date the document, along with your friend and a third-party witness. If possible, the third-party witness should be someone who does not have a close relationship to either party of the loan. For example, an employee at your financial institution is a good choice for a third-party witness as he has no vested interest in the loan or the loan collection. You can also have the document notarized by a notary public to serve as a third-party witness to the document.

Never lend money to a friend if you suspect that person will never repay you. If you wish to remain friends and want to help, consider gifting the money rather than loaning it, assuming you can afford to do so. If a loan to a friend goes unpaid, it can be the unspoken issue that eventually makes it too uncomfortable to remain friends.

  • Loan Agreement FAQ
  • Lending Money to a Family Member
  • “What Is a Loan Agreement?” Accessed Oct. 23, 2020.
  • U.S. Department of Education Federal Student Aid. “The Standard Repayment Plan is the basic repayment plan for loans from the William D. Ford Federal Direct Loan (Direct Loan) Program and Federal Family Education Loan (FFEL) Program.” Accessed Oct. 23, 2020.
  • Corporate Finance Institute (CFI). “Amortization Schedule.” Accessed Oct. 23, 2020.
  • Consumer Financial Protection Bureau. “What is a prepayment penalty?” Accessed Oct. 23, 2020.
  • Consumer Financial Protection Bureau. “Loan Estimate and Closing Disclosure: Your guides in choosing the right home loan.” Accessed Oct. 23, 2020.
  • Consumer Financial Protection Bureau. “What is a balloon payment? When is one allowed?” Accessed Oct. 23, 2020.
  • “2 Different Types of Personal Guarantees Your Business Needs to Understand.” Accessed Oct. 23, 2020.
  • Consumer Financial Protection Bureau. “Know what is negotiable.” Accessed Oct. 23, 2020.

Kaye Morris has over four years of technical writing experience as a curriculum design specialist and is a published fiction author. She has over 20 years of real estate development experience and received her Bachelor of Science in accounting from McNeese State University along with minors in programming and English.

How to write a loan agreement between friends

Failure to pay back debts, especially substantial ones, can be an awkward topic even among the closest of friends. To reduce any eventual difficulties in claiming back what you lent out, you should always take note of who the borrower is and know where you can take any future claim. One option to consider when lending money to friends or family members is a simple IOU loan agreement.

What is an IOU?

An IOU is an informal contract setting out the necessary details of a loan and may be used as evidence of a debt of money or other products lent.

If a large amount of money is involved, you may wish to seek security or collateral on the loan and include this explicitly in the IOU. For instance, you may wish to claim your friend’s assets as repayment should he be declared bankrupt. Please contact a lawyer if this is something you wish to set up, especially as securities can be particularly complicated.

While informal, you should still take steps to make it professional and covering all the necessary details. The following details should be written down on the document.

  • Your name
  • The name of the individual(s) received the loan
  • The amount of money lent or items loaned
  • When the money or the items should be returned
  • Is there any interest charged, and if so, how much
  • Each party’s signature
  • Each witness’s signature.

While it may appear that an IOU is easy to draft, it is important to note that essential details can be easily left out and this may make recovering the debt more challenging if the situation turns difficult.

How can an IOU help?

Unfortunately we have seen many cases of debt recovery where a friend has loaned money to another friend who has in turn failed to live up to the agreed terms. In these situations it would be normal to issue a letter of demand to the debtor and seek immediate action on their part to pay the debt.

A well drafted IOU agreement which clearly lays out the what was agreed, signed by both parties and witnesses acts as a perfect source for instigating a debt recovery process.

Can I Charge Interest on the Debt in Singapore?

It is possible to charge your friend interest, so long as you follow these guidelines.

You will need to prove that you do not run an unlicensed money lending business. Unlicensed money lending is prohibited under the Moneylenders Act (Cap 188), and section 3 of the Act states that “any person who lends a sum of money in consideration of a larger sum being repaid, shall be presumed, until the contrary in proven, to be a moneylender.”

It is also vital that both of you, the lender and borrower, agree on the amount of interest to be paid. This should be included in the IOU to make it clear that the borrower was aware of the amount of interest to be paid. A template for such a declaration could be: “I agree to an interest rate of X% or the maximum allowed by law.”

As the Moneylenders Act and Moneylenders Rules 2009 only state, the maximum chargeable interest for licensed moneylenders, such restrictions would not apply to you. As such, the amount of interest will be up to you and your borrower’s discretion.

How long can I use an IOU as evidence of a debt in Singapore?

An IOU can only be used within six years of a cause of action, or a reason for you to bring your case. Essentially:

  • If there is a repayment date set and the debt goes unpaid past that date, you will have to file a claim within six years of the stated date.
  • If there is no repayment date set, the six-year time limit will start from when there is a cause of action.

In the second case, there can be ambiguity as to what can be considered a cause of action. Do consult a lawyer to determine when the six-year time limit begins if you are in doubt.

What is a Promissory Note?

A promissory note is a more formal document that specifies the details of the loan. It takes note of the amount lent out and the debtor’s identity like an IOU would, but also goes a step further. It would typically detail:

  • Action(s) required for the repayment of debt
  • Any liability facing the borrower
  • Any consequences should the borrower fail to repay

If you believe setting these details in advance would be better, it would be advisable to consult a lawyer on what is achievable and recommended when drafting a promissory note.

Can I sue them and make them a Bankrupt?

If the person is an individual and not a company and he or she borrows S$15,000.00 or more, then you may be able to bring about a case of bankruptcy. However, this might be an extreme measure and should only be considered in extreme situations where the debtor is simply not willing to repay the debt but still has money and assets under their name.

How can we help?

If you would like a lawyer to draft a simple IOU agreement then please reach out to us via the form below, or give us a call on +65 6298 2537. If you are considering legal action to recovery a debt, this is also something we have significant experience in, and the initial steps for personal loans between friends or family members tend to be relatively inexpensive.