A private loan contract, an agreement between two or more parties, outlines the terms of the private loan. Usually, this is between friends or relatives. Having the terms of the agreement in writing ensures all parties accept the loan terms and repayment schedule. Oral contracts are enforceable but much harder to prove if a dispute arises or one of the parties becomes ill or dies. Oral contracts can also be forgotten or misinterpreted. If the parties involved are not on the same page when it comes to their responsibilities in the loan, it can quickly ruin the relationship between the parties.
Find out what the loan will be used for. This will need to be included in the contract, so make sure you have a clear understanding where this money will be going.
Decide whether or not you want to ask for collateral. If you want collateral included in the terms of the loan, it will need to be mentioned in the contract. Schedule a meeting time with all parties involved. The lender and borrower need to attend this meeting. Invite a neutral witness, recommends Laurel A. Vietzen, author of Understanding, Creating and Implementing Contracts.
Write out the terms of the loan while at the meeting to ensure that all parties agree on the terms. The best outcome for a private loan will be to have the loan repaid in full, on time and with interest. In order to achieve this you want to make the terms of your contract fair and reasonable.
Clearly define all terms in the contract. Include the loan amount and interest terms. Even if lending to friends or family, setting a fair interest rate makes sense, states Drafting Contracts author, Tina L. Stark. This lets the other party know you are serious and gives good reason for them to repay the loan faster. Also include the repayment time frame and increments of payment. If possible, include how the loan will be paid back (i.e. cash, check, money-order). Be as clear and detailed as possible. This makes it easier for both parties involved to keep their end of the agreement. Each party involved should go over the agreement.
Sign and date the contract in front of a notary public. Have all other parties involved sign and date the contract, then have the contract notarised, advises Peter Siviglia, author of Writing Contracts. Make a copy for each party and keep the original in a secure place.