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There are some situations where you as a private individual might need to lend money to another person. A couple of them might be lending money to a friend or family member and then there is the peer-to-peer (P2P) situation where you make loans as an investment to one of your peers through an online website. Or, you may be the borrower in these situations.

In any case, when you are the lender or borrower in a loan situation, a contract must be written. A contract is simply a promise on the part of the borrower to pay the lender along with interest at a pred-determined, specified time. A contract spells out the terms in writing so that there are no misunderstandings between the borrower and lender. Should anything go wrong during the term of the contract, it is admissible evidence in court of the agreement that was in effect between the two parties.

What Goes on the Contract?

A money borrowing contract must contain the names of both parties along with all contact information. This is followed by the date the contract is to take effect and the amount of the loan. Another important piece of information that goes on the contract is the agreed upon interest rate. The payment terms should be clearly specified giving the amount of each payment and when it is due.

Other sections that need to be specified in a money borrowing contract are the total amount of the loan, any exclusions or exceptions, definitions, and special instructions in the event of default by the borrower. Finally, there should be signature lines for both parties to sign the contract. After the contract is signed, it should be notarized and upon notarization it will become a legal document.

Advice for the Borrower

The number one thing you have to watch out for as a borrower is predatory lending. If you have no idea what this means, visit a payday loan or cash-for-car website and look at their terms. Predatory lending takes advantage of your high-risk situation and charges incredible interest rates for an otherwise small loan.

The most common bit of advice for you as the borrower is to make sure you read everything in the contract and understand it fully. What many do is seek the advice of a lawyer before signing it. One area that is often misunderstood is when there is an arbitration clause. Many people do not understand arbitration clauses but, in simple terms, an arbitration clause keeps you from going to court in the event that there is a dispute between you and the lender. A common complaint about those who have been through arbitration is that it is like a free-for-all and evidence is often introduced that would not stand up in a regular trial. Here again, seeking the advice of an attorney is prudent.

Advice for the Lender

It is important that you as the lender ask the borrower plenty of questions pertaining to the requested loan. Although, if you are lending through one of the online lending sites such as Lending Club or Prosper, you may be limited in the types of questions you can ask. At a minimum, you will want to ask the borrower what the loan is for.

You should pay particularly close attention to how you write the exclusions and exceptions portion of the money borrowing contract. This section specifically defines how you can recover assets should the borrower default on the loan. And, if you want the borrower to stay in the country for the life of the loan then it should be specifically stated here.