Money can create a rift even in between blood relations; let alone friends. Hence, while lending money to or borrowing from a friend, think about the relationship first. For you can earn money anytime in your life, but once friendship is ruined, it will take years to start it again. Hence, you must deal with money matters with friends keeping aside your friendship and acting as a businessperson. If you don't want to lose your friendship, draft an official loan agreement adding the money lent, rate of interest, fine, and payment dates.
Before writing the agreement, talk to your friend and ask him how he is going to repay the amount you are lending. This will help in drafting the agreement terms. Start the letter by mentioning the amount lent. Since you will be lending the money from your own personal account, you must use 'I” and the borrower's name. Avoid using a nickname of your friend. Check his social security number or a driving license for his correct and full name. You must also include your name in the letter at the beginning after “I”.
After that you have to mention how money will be repaid, will there be any interest on it or is it interest-free. If the money is lent for a number of periods, include the date of each period on which the installment of the borrowed money with interest or without interest must be paid. Besides the date, you must also include the mode of payment such as check, cash, demand draft, and traveler's check. There should as well be mention about the fine in amount if the borrower fails to repay the money on due date.
The letter must clearly state “loan agreement” so that it can have legal significance. Using this formal term would also make the agreement serious. The borrower will also understand the seriousness of the agreement, and he will make efforts to stick to it. Lastly, ask your friend to sign the agreement and give a copy of it to him. The signature must be attested in front of a notary. You can also draft the agreement by including your full name and residence address like this sample.
This loan agreement is made on February 12, 2014, between:-
Steve, Son of Mark Resident of B/11Green Avenue Park LA, (hereinafter referred as the Lender) AND
Mike, Son of George Resident of V6, Lake street View LA, (hereinafter referred as the Borrower)
While the Borrower needs money and is in a friendly term with the Lender, the Lender has made a loan of $10000/- (Ten Thousand Dollars only) to the Borrower.
The money is lent for a six-month period. Both the Borrower and the Lender have agreed on the payment terms. According to which, the payment has to be made on 12 of every month for a six-month period. The first payment date will be March 12, 2014, and the last payment date will be August 12, 2014. The money is lent on an interest rate of 6%. As such, the monthly payment amount will be $1767.
The Borrower will have to pay $50 extra in case payment is not made on the due date. Payment is acceptable in cash, check, and demand draft.
Mike George (Borrower)
Steve Mark (Lender)
It is not a better idea to lend money to a friend. Especially, when you are confident that he will not pay you back. If you still want him to be your friend forever, than instead of loaning it, gift him the money, provided your financial condition permits you.