An IOU note is commonly used to record the promise to pay a debt. This document can be used amongst family and friends and when borrowing money from a bank or credit union. When banks issue IOU notes, the document is referred to as a promissory note.
The IOU note records pertinent information about the loan. It should include the names and contract information for the borrower and lender, total amount of funds borrowed, installment amounts and dates, interest rate, and maturity date. Financial institutions usually include a default clause which states what action will be taken if borrowers default on the loan agreement
People often fail to create promissory notes when entering into personal loans. However, this document can prevent misunderstandings and minimize risks of non-payment. It is not uncommon for family members to loan money and never be repaid. This can lead to family rifts and hard feelings. Borrowers often claim they thought the loan was a gift or place repayment on the back burner because funds were loaned by a loved one.
While the saying of don't lend more money than you can afford to lose always holds true, most people expect to be repaid when they provide personal loans. If borrowers do not repay the loan and lenders do not execute an IOU note, they have no evidence to present to the courts. When properly executed, promissory notes are considered a legal contract and can be used to obtain a court ordered judgment.
Banks and credit card companies use carefully crafted promissory notes which are easily upheld in a court of law. Individuals providing personal loans can download preformatted templates via the Internet or purchase fill-in-the-blank promissory note forms from office supply stores. When personal loans are over $1,000, private lenders may find it better to hire a lawyer to draft the contract.
Individuals offering privately financed loans are legally allowed to charge interest. However, funding sources must abide by state usury laws. Those who charge higher interest rates than allowed by law could face legal consequences.
It's always best to consult with a lawyer to ensure compliance when lending large sums of money and collecting interest, but private lenders can investigate allowable interest rates by state at UsuryLaw.com.
Another thing to consider when engaging in private lending is IRS regulations. When loans exceed $13,000 the IRS requires loans to be secured with a promissory note to provide evidence the loan is not a gift. Without the IOU note, the IRS can require borrowers to pay gift tax.
One source private lenders may find helpful is Virgin Money. This peer-to-peer social lending program includes a host of financing tools to record loans, create legally-binding IOU notes, assess appropriate interest, and track payment records.
Borrowers establish a Virgin Money account and pay fees to use services. Fees range between $99 to over $500 and are based on the type of loan used. In addition to personal loans, Virgin Money also engages in secured loans such as mortgage notes and car loans.
When lending large sums of money via personal loans it is always a good idea to talk to a tax accountant or attorney. IOU notes do not have to be used with all types of loans, but are required when securing mortgage notes, business notes, and most loans using collateral to secure financing.
We invite you to learn more about protecting funds offered through personal loans using an IOU note in our personal finance article library.
Published on January 14, 2011 at 03:47 AM