Keys to a Successful Personal Loan Agreement

LoanBack.com on 02/16/2011

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After both parties have settled on the basic terms of their loan, there is still a lot of work to do in order to ensure a successful loan. As with any agreement, both parties should believe they are getting a fair deal and have a clear understanding, in writing, of their obligations and responsibilities over the course of the loan.

Before the loan is formalized, it’s good to have everyone take a step back and make a quick sanity check. Is the loan amount correct? Is the interest rate fair? Have you agreed on what happens if a payment is not made on time?

Once both parties are clear on the loan details, it is time to put everything into a legally binding loan agreement or promissory note. If you use LoanBack to formalize your loan this agreement will automatically be created for you after you answer a couple of simple questions using the loan wizard.

Once you have a document that is ready to sign, see if you can meet in person with your counterparty to do one final pass over the document. Then both parties should sign two copies and store them in a safe place. If you use LoanBack to formalize your document, both sides can agree to the document and store it online.

Now that your loan is active both parties need to track the performance of the loan. At LoanBack, you can manually track your loan using our LoanBuilder product.

Over the life of your loan it is important that both parties stay in touch with each other. If possible, they should meet quarterly or annually over the phone or in person to review the condition of the loan and discuss any potential issues before they become problems. If at any time during the loan either party has a problem living up to their obligations, they need to raise the issue as soon as possible. Given the emotional component that accompanies personal loans, both parties need to be up front about any issues they might have with the loan.

If the loan deteriorates to a point where the borrower is contemplating defaulting on the loan or the lender considers writing off the loan, both parties should take a moment to consider their options. When a personal loan goes into default, there is a high probability that the personal relationship will also fall into foreclosure. If both parties are amenable, they have many options to restructure the loan and save the relationship. The lender could forgive a portion of the principal, reduce the interest rate, extend the term or move a portion of the principal into a balloon payment at the end of the loan.

Keys to a successful personal loan

- Before your final agreement take a moment and make sure everything makes sense

- Document everything in a legal loan agreement or promissory note

- Meet in person, if possible, to review the final document and make sure both parties have the same understanding of any special loan covenants

- Agree on how to track the performance of the loan using a service like LoanBack

- Meet on a regular basis to review the loan and discuss new developments

- If either party has an issue with their obligations in the loan, don’t delay in raising the issue with the other person
- If the loan runs into trouble, both parties should sit down and attempt to restructure the loan before defaulting or writing off the loan

More Information
Personal Loan Terms Among Friends Can Be Negotiated – American Chronicle
Borrow Money From Friends, But Pay Special Attention To The Promissory Note -
Ezine Articles
Loans Among Friends and Family: Win – Win, or Sure Loss? -
Agriculture Federal Credit Union