How to Write a Payment Agreement

This article was co-authored by Clinton M. Sandvick, JD, PhD. Clinton M. Sandvick worked as a civil litigator in California for over 7 years. He received his JD from the University of Wisconsin-Madison in 1998 and his PhD in American History from the University of Oregon in 2013.

This article has been viewed 1,101,461 times.

A payment agreement, also referred to as a “promissory note,” is an agreement that sets forth the terms of a loan and its repayment. If you are considering lending to or borrowing from someone you know, you should draft a payment agreement. This agreement explains the conditions of the loan, the interest amount, the parties involved in the loan, and when the loan is to be repaid. By having the agreement in writing and notarized, you ensure that all of the parties to the loan are in agreement.

Beginning the Payment Agreement

• For example, if you are drafting a student loan repayment agreement, then its contents would differ substantially from the information provided here. [1] X Research source

• Avoid fonts that are smaller than 10 point, as they may be too hard to read. Avoid fonts that are larger than 14 point; it is unnecessary and will waste paper.
• Choose a professional-looking font face, such as Times New Roman or Arial. Skip the handwritten fonts, such as Comic Sans. Although legible, they look unprofessional.

• Consider making the title slightly bigger than the rest of your font. For example, if you used 12 point font throughout your document, try 14 point for the title.
• Keep the title simple. You can title the note “Payment Agreement” or “Loan Agreement.”

• “This loan agreement (‘Agreement’) dated this 12th day of August, 2015, made between Michael Smith, of Chicago, IL (‘Lender’) and Amy Jones of Detroit, MI (‘Borrower’).” [2] X Research source

• “In consideration of Lender loaning money (the ‘Loan’) to Borrower, and Borrower repaying the Loan to Lender, both parties agree as follows.” [3] X Research source

Explaining the Terms of the Loan

• “Lender promises to loan $5,000 USD to Borrower. Borrower promises to pay back this amount to Lender, with interest payable on the unpaid principal at a rate of 4% per annum, calculated yearly not in advance.” [5] X Research source

• “Borrower will make payments as set forth on Schedule I. The Loan will be repaid in full on August 12, 2016.” [6] X Research source

• “Borrower has the right to make payments of principal before they are due. Borrower may make a full prepayment or partial prepayments without penalty, provided Borrower gives advance notice of its intent to prepay. Lender will use prepayments to reduce the amount of principal. If Borrower makes a partial prepayment, there will be no change to the due date or in the amount of the monthly payment unless Lender agrees.”

• “If Lender has not received full amount of any monthly payment within 15 calendar days after the date it is due, Lender may assess a late charge to Borrower of 1% of any overdue payment.”

• The lender usually reserves the right to immediately demand payment of all outstanding principal and interest.
• Sample language: “If Borrower defaults in the performance of any obligation under this Agreement, Lender may declare the principal amount owing and any interest due immediately due and payable.” [7] X Research source With this provision, the lender doesn’t have to declare a default, but he or she has the option if payment is missed.

Finalizing the Payment Agreement

• “No modification or waiver of any provision of this Agreement shall be effective unless executed in a writing signed by both parties.”

• “This Agreement contains all terms agreed to by the parties relating to its subject matter. It replaces all previous discussions, understandings, and agreements, whether oral or in writing.”

• “If any part of this agreement is declared invalid or unenforceable, the remainder shall continue to be valid and enforceable.”

• “This Agreement shall be construed according to the laws of Illinois.” [8] X Research source

• Name
• Title
• Date

• You can find notaries at most large banks, court houses, and city manager’s offices.
• As an alternative, you can also use the Locator feature at the website for the American Association of Notaries.
• You should take sufficient personal identification to show the notary. Generally, a valid driver’s license or passport should be sufficient.

Deciding Whether to Make a Loan

• Do you need to save additional money for retirement? If so, then lending might not be the best idea.
• Do you have debts yourself that you need to pay off? You could pay off your loans earlier if you don’t loan to friends or family.
• How important is it for you to be repaid and can you afford to make the loan? Loaning money to someone you know can put a serious strain on your relationship. If they are unable or refuse to repay the loan, you will have to weigh the importance of the relationship against your need or desire for repayment.

• However, other people might be taking a loan to cover other loans. This is a sign that the person is in financial distress. Instead of making a loan, you should recommend that they see a credit counselor.

• These might not sound like ideal situations, but they are less risky than giving a monetary loan, which might not be repaid.

• If you are borrowing money, be honest about your financial situation and when you can reasonably expect to begin repaying the loan.
• If you are lending money, set a hard limit on the amount that you are willing to lend and decide when you need the money repaid.
• If both parties state their needs and concerns, it is less likely that either party will resent the other party to the agreement.

• If you are borrowing money, do not overestimate how quickly you can repay the loan. Create a budget and plan how and when you can reasonably make the loan repayments.
• If you are lending money, determine how quickly you need the money back and whether you can make an extended loan so that the borrower has an easier time repaying you.
• You can calculate repayment schedules and interest using loan calculators online. [10] X Research source

Expert Q&A

If you're dealing with a large sum of money, you should consider hiring an attorney, at least to review your agreement and ensure that it is enforceable in court.

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1. ↑https://www.opm.gov/policy-data-oversight/pay-leave/student-loan-repayment/sample-agency-plans/sample-student-loan-repayment-program-service-agreement/
2. ↑https://www.lawdepot.com/contracts/loan-agreement/#.V4E8hNJTHIU
3. ↑https://www.lawdepot.com/contracts/loan-agreement/#.V4E8hNJTHIU
4. ↑https://www.debt.org/credit/loans/friends-family/
5. ↑https://www.lawdepot.com/contracts/loan-agreement/#.V4E8hNJTHIU
6. ↑https://www.lawdepot.com/contracts/loan-agreement/#.V4E8hNJTHIU
7. ↑https://www.lawdepot.com/contracts/loan-agreement/#.V4E8hNJTHIU
8. ↑https://www.lawdepot.com/contracts/loan-agreement/#.V4E8hNJTHIU
9. ↑https://business.time.com/2011/09/16/the-right-way-to-loan-money-to-family-and-friends/

About This Article

This article was co-authored by Clinton M. Sandvick, JD, PhD. Clinton M. Sandvick worked as a civil litigator in California for over 7 years. He received his JD from the University of Wisconsin-Madison in 1998 and his PhD in American History from the University of Oregon in 2013. This article has been viewed 1,101,461 times.

A payment agreement is an agreement that sets the terms of your loan and its repayment. If you're going to lend someone money, it's a good idea to write a payment agreement to cover yourself legally in case they don't pay you back. A payment agreement doesn't need to be complicated. Just include the conditions of the loan, the interest rate, the parties involved, and when the money is due. You could even just find a sample payment agreement online and use that as a template. You might be required to get your payment agreement notarized, so remember to check your state's requirements. For more advice from our Legal co-author, including how to decide if you should lend money to someone, read on!