How to Write a Payment Agreement

A payment agreement, also referred to as a promissory note, is an agreement that sets forth the terms of a loan and its repayment. If you are considering borrowing or lending money from someone you know, you should draft a promissory note. This note explains the conditions of the loan, the interest amount, the parties involved in the loan, and when the loan is to be repaid. By having the agreement in writing and notarized, you ensure that all of the parties to the loan are in agreement.

EditSteps

EditDrafting a Legally Enforceable Agreement

1. Agree to the terms of the promissory note. You should meet with the other party to the loan and discuss the potential terms of the promissory note. Both parties must come to a final agreement about the terms of the loan in order for the contract to be enforceable.
2. Include all of the requirements for an enforceable agreement. In order for a contract or payment agreement to be enforceable under the law, there must be an offer of terms and an acceptance of terms by parties to agreement.
   • An offer can come from the borrower, who agrees to certain repayment options and the acceptance may come from the lender when they provide the borrower with the funds. This agreement should be set forth in a written and signed agreement, as discussed below.^[1]
   • In addition to an offer and acceptance, there must be consideration or value in the agreement. For a promissory note, consideration for the promisor or borrower is in the form of the loan and consideration for the lender or promisee is in the promise of the promisor to repay the loan.^[2]
3. Put the terms in writing. Regardless of the size of the loan, you should draft a written agreement outlining all of the terms for the loan. While some states may not require a written promissory note for small loan amounts, you should still commit your agreement to paper. This prevents people for saying that you made a gift of the money or trying to change the terms at a later date.^[3] You should check your state’s laws for a promissory note, but generally your written agreement should include the following:
   • Full name and address of the lender (also referred to as the promisee or payee).
   • Full name, address and phone number of the borrower (also referred to as the promisor or maker).
   • The amount of the loan and the date the money is given to the promisor.
   • The amount of interest being charged, if applicable.
   • The interest rate or penalty for late payment, if applicable.
   • The date by which the loan must be paid.
   • The method of repayment and the amounts. For example, if a promisor is making monthly payments, specify when the monthly payment is due and the amount of the payment, including any interest.
   • The date of the promissory note.
   • The signature of both parties. ^[4]
   • You can find a list of state-by-state laws regarding promissory notes at: http://ift.tt/23ySqwU. Look for your state under the heading “Article 3,” which is related to promissory notes.
   • You can review a sample promissory note at: http://ift.tt/1VP4XXx.
4. Sign and notarize the document. Both parties should sign the document in front of a notary. Failure to do so may make the agreement difficult to enforce should the promisor fail to repay the loan. ^[5]

EditEnforcing a Payment Agreement

1. Contact the maker if they miss a payment. If the maker/promisor misses a payment, you should contact them. You can call them or send them an email to discuss what happened and when they expect to send you the payment.
   • There may be any number of reasons why they were late or missed a payment. By contacting them, you make your expectations known and they have a chance to set up an alternate date of payment.
2. Draft a demand letter. If the promisor does not respond after multiple attempts to contact them, it may be necessary for you to draft a demand letter. This is particularly important if they failed to make more than one payment. A demand letter formally notifies the promisor of their failure to pay and sets forth your demand for repayment. This may include a demand for a full repayment of the loan by a certain date. Your demand letter should include the following information:
   • Your name and address and the name and address of the promisor.
   • That you are the holder of the promissory note.
   • The date of the promissory note and the amount of the promissory note.
   • A statement demanding repayment of the loan, including any interest and penalties as set forth in the promissory note.
   • The date the payment is due.
   • A request that they contact you to discuss the repayment process.
   • A statement that explains that if the promisor fails to contact you regarding repayment, you will begin legal collection proceedings.
   • The letter should be dated and you should include your name and signature.
   • Check your state laws regarding promissory notes to ensure that you are complying with any repayment demands.
   • You should send the letter via certified mail, return receipt requested. ^[6]
   • You can view a sample demand letter at: http://ift.tt/20smlbd.
3. File a lawsuit. If the promisor refuses to meet their obligations under the promissory note, you can file a lawsuit to have the promissory note enforced. While filing a lawsuit may help you get your money back, it may also do irreparable damage to your relationship. If you decide to go forward with the lawsuit, you should determine whether your lawsuit must be filed in small claims court or civil court.
   • For small claims court, the amount in owed to you must be below a certain threshold for it to qualify as a small claim. You can view a state-by-state guide for small claims amounts here: http://ift.tt/1awu91T.
   • If you must file your lawsuit in civil court, you should consider hiring an experienced contracts attorney to handle your case.
4. Have judgment enforced. Once the court makes a judgment in favor of the lender, you can request that it be enforced in several ways.
   • The court can require immediate repayment of the funds.
   • The court can require that the promisor’s wages be garnished, which means a certain amount is taken directly from the promisor’s paycheck and delivered to you.
   • You can request that the promisor’s bank accounts be frozen and that the promisor’s bank use those funds to pay the judgment.
   • You can also request a lien against the promisor’s real estate.^[7]

EditDeciding Whether to Make a Loan and How to Protect Your Resources

1. Decide whether to make a loan. Some payment agreements require additional thought about whether to lend the money before anyone drafts the actual agreement. It can be a difficult to decide whether to loan money to a friend or family member, especially when that person is facing a financial crisis. When deciding whether to loan money, consider the following:
   • How important is it for you to be repaid and can you afford to make the loan? Loaning money to someone you know can put a serious strain on your relationship. If they are unable or refuse to repay the loan you will have to weigh the importance of the relationship against your need or desire for repayment.
   • If you have the financial means and you do not want to strain the relationship, you could consider making a gift rather than loaning the money. It may be that the person chooses to repay you at a later date, but since it’s a gift you are never concerned about repayment.
   • If you agree to a loan, you should put the terms of the loan in writing. This ensures that both parties understand the expectations of the agreement.^[8]
2. Discuss the parameters of the loan. Once you have decided to loan or borrow money, you need to sit down with the other party to the agreement and discuss the terms of the loan.
   • If you are borrowing money, be honest about your financial situation and when you can reasonably expect to begin repaying the loan.
   • If you are lending money, set a hard limit on the amount that you are willing to lend and when you need the money repaid.
   • If both parties state their needs and concerns, it is less likely that either party will resent the other party to the agreement.
3. Consider adding interest to the loan. Both parties should discuss adding interest to the loan. While it may initially seem like you are being greedy for suggesting that interest be added to the loan, if you are lending a large amount of money with a lengthy repayment schedule, the lender is actually losing money by giving an interest-free loan. You could always charge the same rate of interest that the lender would have received if the money was in a savings account. It is less important to charge an interest rate for small loan amounts.^[9]
4. Establish a repayment schedule. It is very important to agree to a repayment schedule that works for both parties. This will minimize resentment and tension regarding the borrowed money.^[10]
   • If you are borrowing money, do not overestimate how quickly you can repay the loan. Create a budget and plan how and when you can reasonably make the loan repayments.
   • If you are lending money, determine how quickly you need the money back and whether you can make an extended loan so that the borrower has an easier time repaying you.
   • You can calculate repayment schedules and interest using a loan calculator at: http://ift.tt/1lksfDn.

EditTips

• If your dealing with a large sum of money, you should consider hiring an attorney, at least to review your agreement and ensure that it is enforceable in court.

EditRelated wikiHows

• Write a Legal Contract
• Borrow Money From a Friend
• Lend Money to a Friend

EditSources and Citations

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