You and the borrower should agree on a plan for repaying the loan. Here are some options:
Installment Payments in Equal Amounts
In an installment payment plan, the borrower makes equal monthly (or yearly) payments for a specified number of months (or years) until the loan is paid off.
If you will be charging interest, part of each payment goes toward interest and the rest goes toward principal. When the borrower makes the last payment, the loan and interest are fully paid.
For a ready-to-fill-in promissory note for installment loans with interest, download Nolo's Promissory Note for Personal Loan (Installment Payments With Interest). For a ready-to-fill-in promissory note for installment loans without interest, download Nolo's Promissory Note for Personal Loan (Installment Payments Without Interest).
Once you have figured out the total amount borrowed, the interest rate, and the time over which the borrower will make payments, you can use an online calculator to calculate the amount of each payment. Or you can use a printed amortization schedule, available from commercial lenders, business publishers, and local libraries.
Lump Sum Payment of Principal and Interest
In many loans to friends and family members, the borrower pays off the loan all at once, at a specified future date. This payment includes the entire principal amount and the accrued interest, if any. Again, consult online calculators to figure out the total amount of interest due under your particular plan.
For a ready-to-fill-in promissory note for a lump-sum payment loan with interest, download Nolo's Promissory Note for Personal Loan (Lump-Sum Payment With Interest). For a ready-to-fill-in promissory note for lump-sum payment loans without interest, download Nolo's Promissory Note for Personal Loan (Lump-Sum Payment Without Interest).
Although rarely used in loans between family and friends, you can also structure a loan with a balloon payment. In this plan, the borrower makes equal monthly payments for a period of time. The payments can cover either interest and principal or interest only. These payments pay off some, but not all, of the loan. Then, the borrower makes one final, large payment (called a balloon payment), which pays off the rest of the principal and the remaining interest.
For a ready-to-fill-in promissory note for a loan with a balloon payment, download Nolo's Promissory Note for Personal Loan (Installment Payments With Balloon Payment).
Securing the Loan with Property
In a secured loan, the borrower pledges property (such as a car, computer, or house) as collateral to guarantee payment. If the borrower doesn't pay, the lender gets (or can foreclose on) the property.
Most personal loans are unsecured. However, if you do want security for your personal loan -- a wise idea if other creditors might get in line ahead of you on the same piece of property -- consider what property will be the security and what documents you'll need.
- Tangible personal property. This is physical personal property, such as a car, jewelry, or computer equipment. Complete a security agreement along with the promissory note. You can obtain a sample security agreement from legal bookstores or stationary stores. Also, Nolo's Quicken WillMaker Plus contains standard security agreements.
- Real estate. If you want to secure the loan with real estate, you need a mortgage or deed of trust. Consult a real estate lawyer.
- Intangible personal property. This includes assets, such as copyrights, trademarks, patents, and ownership rights in a business. If you want to secure your loan with intangible personal property, consult a lawyer.
Start a Promissory Note Now
To start creating your promissory note, download one of the Nolo eForms referenced above, or find them in Nolo's Quicken WillMaker Plus software. In addition to promissory note forms, this software contains many legal forms that will help you protect your family and your assets. Or, if you prefer a lawyer's help, find a lawyer in your area whose philosophy you agree with by consulting the Nolo Lawyer Directory.
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