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The first thing you should include is the amount of the loan and the interest rate. Your state has probably set a maximum interest rate you can charge as well, which you can find online.  If you want to charge interest, research your state and federal laws. For example, the IRS requires that you charge a minimum interest rate, otherwise, they may interpret the loan as a “gift” for tax purposes. Sample language could read: “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.” You should include the date the loan will be paid in full. You also might want to attach to your payment agreement a schedule listing when monthly payments are due. On your schedule, list the day of each payment and the amount that the borrower should pay. If you aren’t charging interest, then divide the amount by the number of monthly payments. Sample language could read: “Borrower will make payments as set forth on Schedule I. The Loan will be repaid in full on August 12, 2016.” The borrower might find that he or she can pay off the loan early. You should explain in the payment agreement whether this is allowed. Generally, prepayment is a good deal for the lender because he or she will get the money paid back early; however, the lender would lose out on some interest. A sample prepayment provision could read: “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.” The seller might want to charge a penalty or additional interest if the borrower is late with payment. You should explain what the late charge will be and how you will calculate it. For example, if you want to charge a percentage penalty, you could write: “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.” “Default” occurs when the borrower does not follow the terms of the payment agreement. Typically, the borrower will default when he or she misses a payment. However, the lender usually reserves the right to declare a default.  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.” With this provision, the lender doesn’t have to declare a default, but he or she has the option if payment is missed.
Identify the loan amount and interest. Explain the schedule of payments. Grant a right to prepayment. Explain any late charges. Identify default.