What should I include in a written agreement of terms of a loan from a family member?

March 13, 2008 10:14 PM

What should I include in a written agreement of terms of a loan from a family member?

My dad is going to lend me some money for school. Even though he's my dad, I still think it's important to have a formal written agreement so there is no confusion later about what we agreed to.

We have discussed and agreed on the following:
- Amount
- Annual fixed interest rate
- Frequency of compounding
- When repayment begins
- Amount and frequency of payments
- Length of repayment period
- That interest will begin accruing immediately and will be capitalized until repayment begins
- I will use Bankrate.com to make an amortization table and include it with the agreement
- If he dies before I am done paying it off, I will still owe the money to his estate (it would be deducted from my share of the inheritance so my siblings don't bitch about it)

Is there anything else that should be included in our written agreement?

Any suggestions on where I can find a simple yet effective generic loan agreement form that covers these terms? I've done a little searching online, but all the samples I've found so far are pages of legalese. Although I do think we need a written agreement, I don't think we need one that requires consulting a lawyer to understand!

Thanks in advance!

posted by Jacqueline to work & money (8 comments total)

What happens if things go differently than you expect -- if you are late with one or more payments, if you want to repay faster, etc.
posted by LobsterMitten at 10:31 PM on March 13, 2008

Any suggestions on what those terms should be? Any ideas on what's standard? Both situations are very unlikely to occur but we should probably have something in there just in case.
posted by Jacqueline at 10:51 PM on March 13, 2008

Any suggestions on what those terms should be? Any ideas on what's standard? Both situations are very unlikely to occur but we should probably have something in there just in case.

I would say that you probably don't want a penalty for early payoff, and your dad will probably be fine with that. He's doing this because he loves you and wants to help you, not because he's built a business on recovering that interest over the life of the loan. If you graduate and get a job that allows you to pay faster, I imagine he'd be thrilled with your success, rather than upset at the loss of future interest payments.

For consequences of late payments, you'd include a late fee. That might be a percentage of the overdue amount, or a flat fee. You might include terms the effect that if there are a certai number pf consecutive late payments, he has the right to call in the entire amount. Also, you need to define what constitutes a late payment -- three days, five days, ten?
posted by jewishbuddha at 11:07 PM on March 13, 2008

Conditions related to schooling: If you decide not to finish your degree, how does that impact the loan?
posted by PinkButterfly at 12:51 AM on March 14, 2008

I think what you have already is fine. Maybe just include a clause which says that if some unforeseen circumstance arises which affects your ability to pay, you agree to resolve equitably and promptly by negotiation. Some lawyers would argue this clause does not provide sufficient definiteness to have the agreement be considered as a binding contract. That might be true. But this is more an understanding with your father. It's unlikely anyone is going to take anyone else to court. Just remain diligent and talk it over if circumstances change.
posted by zaebiz at 3:51 AM on March 14, 2008

So at the beginning of the agreement just say "[Jacqueline's dad's name] agrees to lend [Jacqueline's name] a sum of money for the purpose of school fees according to the following terms :
Then list the details you gave above in the form of understandable English sentences. Then include the clause I mentioned above.

Then include at the bottom -
Signed
_______________ [Dad's name] , Date ___________
_______________ [Your name] , Date ___________

Don't think that this isn't necessary legally binding just because of its somewhat informal nature and because of what I said above. Dad would still could make a pretty strong case that you had an intention to be bound contractually because such written agreements between father and daughter would not be the norm.

And if something goes wrong, don't come after me! I'm just some random guy on the internet who you don't even know. ;-)
posted by zaebiz at 4:13 AM on March 14, 2008

I'm slightly confused about the question, so before I answer it wrong and get scolded by the mods, let me ask a clarifying question: do you want to know what is typically in a short form loan agreement, or do you want to know what an agreement between a father and his child to loan money for school looks like? What you're drafting here is somewhere in between.
posted by The Bellman at 7:50 AM on March 14, 2008

You can make an amortization table in Excel that will allow for extra payments, or even missing/short payments, for that month when the transmission needs emergency repair. I'd follow zaebiz' recommendation; it's a good mix of legal and personal. I borrowed from my Mom, paid it back faithfully, and it was a good experience for both of us. We did have a loan agreement, written by a lawyer because it was part of buying a business.
posted by theora55 at 9:19 AM on March 14, 2008