Views expressed in this blog are mine alone and are not intended to represent Williamson County policy nor intended as legal advice.
Folks loan friends and family money all the time. Most of the time, nothing untoward happens. The money gets repaid or the loan forgiven and all is well. But sometimes, well, things go south. The money never gets repaid and relationships suffer.
The best way to avoid this isn’t to never make a loan, it’s to make a written contract. Oral contracts are valid but enforcing them can be challenging. They depend on the memory of the parties involved which can be manipulated or simply forgotten. In any contract, written or oral, basic contract requirements must still be met: offer, acceptance, and consideration. Consideration is something of value that a promisor (the person making the offer) receives from the promisee (the person accepting the offer), usually some form of interest in a loan.
There is something called a Statute of Frauds which requires certain types of contracts to be in writing, generally those regarding real estate or that exceed a set value. In Texas, that value is $50,000. Despite this large value, it’s still best to consider a written contract for smaller amounts. Just like you’d contract with a builder to remodel your home, you want to have a contract with any loan.
If you receive a loan from a bank, you’ll know you’ll be signing a contract. You should treat a loan to a friend or family member with as much respect. Having everything in writing helps avoid problems further down the road.
Contracts such as these need three things:
• The amount borrowed (principal)
• Interest rate (if applicable)
• Repayment terms (monthly installments over a set period of time or a lump sum on a certain date)
You should also address what happens if the terms of the loan aren’t met:
• Adding additional costs to the loan
• Modifying the loan terms
• Taking ownership of collateral
• Pursuing legal action
Communication is the key here and why having a written contract is so important. It may feel impersonal, but it protects both parties. If you’re having trouble getting repayments on a loan, make sure to keep lines of communication open. If you’ve loaned someone money to start a business, it’s reasonable to ask for regular updates. Recognizing that the possibility of difficulties arising exists is important as well and helps both sides be realistically prepared if they and when they do. Don’t wait for emotions to run high before addressing problems. Plan ahead.
If you’re lending money, make sure you can afford to do so. Make sure you’re willing to impose penalties if payments are late and foreclose if they default. Make sure that the person understands this is a loan and not a gift. Most importantly, get it all down on paper. It doesn’t have to be in fancy legal terms. Plain English is fine if both parties agree to what’s outlined. Get it signed and witnessed.
Most of the small claims cases I see in my court would benefit from a clearly written contract. Make sure you agree on terms and terminology. If something you’re asking a contractor to build for you must meet very specific standards for you to be satisfied, make sure those standards are clearly delineated and included in the contract. If you’re loaning funds, make sure you agree on repayment plans in writing.
Resources for personal loan contracts: