ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Promissory Note for Personal Loans

Updated on January 30, 2011

Promissory Notes: Personal Loans to Friends and Family

Protecting yourself with a promissory note when making loans to family and friends.

It is common to loan money to a family member or a friend when in need of it and seal to this deal is often the word or a handshake. Unfortunately as time passes, memories fade and lead to disagreements. Protect yourself by making an promissory note that details the terms of this loan agreement.

Promissory Note Basics

A promissory note is a promise to pay back money to someone. It is a written evidence of the debt amount and the terms decided at the time of loan giving. This note also includes repayment schedule, interest rate (if any) and any other terms between them.

The three important questions to start and decide upon are:

  • Amount of money to loan
  • If interest to be charged then how much
  • The repayment schedule

Should You Charge Interest?

Charging interest to a friend or a family member is often considered as being ungenerous by many people but this view is often based upon a misconception about the function of interest, which is to reasonably compensate the lender for the use of his money.

For example: Let us suppose if Aashish lends Ketan the amount of 2,50,000 for a year (interest-free). If Aashish puts his money in bank he would earn interest for that time period. But by giving the money interest-free to Ketan he bears the cost of lending the money to Ketan. Nevertheless, when lending a relatively small amount to friends or family, you may prefer to lend the money interest-free.

Interest-free loans and IRS: The IRS on the interest-free loan can “impute” interest on the loan. Let us assume that you have earned the interest and require it to report as a taxable income but for most of the personal loans that won’t be a problem. The uncharged interest can be treated as tax-free gift as long as the total amount given to the borrower is less then the gift-tax exclusion.

Types of Promissory Note Repayment Plans

You and the borrower should agree on a plan for repaying the loan. Here are some options:

Installment Payments in Equal Amounts

In this payment plan the borrower makes equal monthly or yearly payments for some specified recursive period of time which is until the loan is paid off completely.

If you are charging interest then the part of each payment goes towards the interest and other towards the principal amount. When the last payment is made the loan or the principal amount together with the interest is fully paid.

One can calculate the interest depending upon the interest rate and time over which the payments would be made. There are various online interest calculators available to calculate the amount of each payment.

Lump Sum Payment of Principal and Interest

In many cases the loans given to friends and family are often paid back all at once with interest as decided on the promissory note. This payment is inclusive of the entire principal amount together with the interest.

Balloon Payments

This method of payment is rarely used in loans towards family and friends, in this plan the borrower makes equal payments for a period of time (the payments can cover interest and principal, or interest only). These payments pay some amount of the loan but not complete and hence the last payment is made by the borrower which is a large payment known as the balloon payment to complete the principal and the remaining interest payment.

Securing the Loan with Property

Securing loan with the borrower’s property such as computer, car etc as guarantee payment scheme. If the borrower fails to pay the lender then the lender gets back the property.

Most personal loans are unsecured. However, if you do want security for your personal loan, consider what property will be the security and what documents you need.

  • Tangible personal property.
  • Real estate.
  • Intangible personal property.

Comments

Submit a Comment

No comments yet.

working

This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

Show Details
Necessary
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
Features
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Marketing
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Statistics
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)