How to Write a Loan Agreement Between Friends

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It is not the best idea to loan money to a friend because if he defaults, it can ruin your close relationship. However, if you do decide to loan money, you have to put aside the friendship for a moment and get into a business mindset regarding the transaction. Draw up an official loan agreement that gives crystal-clear information on how you will be repaid.

1 Ask your friend

Ask your friend over to your house on the day you plan to loan her the money to have a talk and write up the agreement. It is important that you write and sign the contract before money exchanges hands, the same as if this were a loan transaction with a bank.

2 Ask the friend

Ask the friend when he can realistically pay back the loan. If this is an installment loan, find out how much he can afford to pay on a monthly basis. Whatever he answers, add another two months to the arrangement as a friendly gesture to allow him more than enough time to make good on the debt.

3 Write the date at the top of the letter

Write the date at the top of the letter. Write the name and address of both you and the friend at the top of the letter and identify each person as either the "borrower" or the "lender."

4 Start the letter off

Start the letter off by stating the general purpose of the agreement. Use formal terminology and titles. For instance, "This is a loan agreement between Mr. Smith (lender) and Ms. Jacobs (borrower)." If you use informalities like nicknames in the agreement, your friend may not take it as seriously.

5 Include the amount

Include the amount of the loan and the date when it must be repaid. "Mr. Smith has agreed to lend $100 to the borrower to be repaid by July 5, 2010." If this is an installment agreement, write in the amount of the monthly or weekly payment, along with the number of months or weeks that it must be paid to satisfy the debt.

6 Add information about any interest

Add information about any interest your friend will have to pay over the course of the loan, though interest charges are not very common in a friendly agreement.

7 Have your friend

Have your friend sign the bottom of the agreement in the presence of a notary. Get a copy so he can have one in his possession.

Louise Balle has been writing Web articles since 2004, covering everything from business promotion to topics on beauty. Her work can be found on various websites. She has a small-business background and experience as a layout and graphics designer for Web and book projects.