Promissory note | Contract of loan | Loan

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Lend money safely with a promissory note and contract of loan

Easily protect yourself and get repaid whenever you lend money with either a promissory note or contract of loan

Many disputes are rooted in money and it’s likely that you will encounter some borrowers who are difficult to deal with when lending money. These are the borrowers who are either delayed in payments or fail to pay at all. This problem is more likely to happen nowadays with the economic recession brought by COVID-19. So before lending money you should take steps to protect yourself as much as possible from the possibility of the borrower either delaying or defaulting in payment. The simplest and most cost-effective way to protect yourself is to put everything in writing and not rely on verbal agreements. This is regardless if you’re lending to a close friend or relative.

A written contract can protect you in 2 basic ways.

First, while asking for a written contract may seem offensive and signal that you don’t trust the borrower, the opposite is actually true. A contract lays down in writing exactly what your expectations and understanding of the agreement are. This gives the borrower an opportunity to review the contract and make sure that both sides have the same expectations and understanding. In short, it ensures you and the borrower are clear from the start on what you understood.

A contract helps the borrower understand important terms of the loan such as interest rates, repayment conditions and penalty fees. On the other hand, you can make yourself clear on when you expect to get your money back and how much interest is due.

Second, the written contract serves as written evidence of you lending money to the borrower and expecting to be repaid. You can confront the borrower with the written contract to enforce payment in case of any delay or default. If things go south and you are forced to file a case in court, you can present the written contract as evidence to increase the chances of you getting a favorable judgement and recovering your money.

What type of contract do you need when lending money? There are two common documents used when it comes to lending and borrowing money – they are a promissory note and contract of loan.

The simpler one between the two, a promissory note is a document proving the borrower’s obligation to repay you. It specifies the amount of money borrowed, the agreed interest rate, repayment terms and is normally signed by the borrower alone. On the other hand, a contract of loan is a more comprehensive document setting out the obligations of both you and the borrower in relation to the loan. It is signed by both the lender and borrower to show their consent to the terms. This is usually more complicated and detailed than a promissory note and includes various provisions governing different situations that may happen over the course of the loan.

A promissory note is best used if the loan involves a small amount of money and contains simple and straightforward terms.  On the other hand, use a contract of loan for loans involving large sums of money and if you want to be as comprehensive and detailed as possible in the terms of the loan. A rule of thumb is to use a promissory note for simple transactions and a contract of loan for complicated transactions.

Start creating your promissory note and contract of loan on Legal Tree anytime online within minutes. If you need to talk to a lawyer for help with your loans or collecting from your borrower, you can consult our Partner Lawyers for legal advice. 

Legal Tree - Published on 14 July 2020