Writing a Legally Binding Loan Note

Your best friend just hit you up for money, and although you don’t want to get too formal, without a proper (and legally binding) loan note, there is a chance that you will never see your money again. Here’s what needs to be included in a legally binding loan note or IOU:

  • The exact amount of the loan – the amount that is being borrowed and owed.
  • How and when it will be repaid – in a lump sum, or in incremental amounts over time, including the specific dates or time period.loan-agreement
  • Any interest that will be charged. Although it may feel wrong to charge a friend or family member interest, if you don’t you’re basically giving them a gift. Just make sure you don’t charge an unreasonable rate – rates 15 percent to 20 percent are generally not allowed, but, depending on state law, the maximum allowed interest rate may be even lower.
  • Amount after interest has been applied – principal plus interest.
  • Terms for late or missed payments, if applicable.
  • Default terms – what will happen if the borrower fails to repay the loan in a timely manner.

Other Important Considerations

The loan note should also identify and be signed by the borrower. If it is unsigned, the note will not hold up in court. When the note is paid off, you can issue a Release of Promissory Note to signify the end of both parties’ commitments under the note. This can help prevent future disputes regarding the loan.

If the loan you are considering involves collateral or a substantial amount of money, you may want an expert to review the terms of the note to help ensure that it is legally binding and that the terms can be enforced. Contact an experienced business lawyer at O’Keeffe O’Brien Lyson Foss online, or call 701-235-8000 or 877-235-8002 (toll-free) today.

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