Lending Money to a Friend: What to Put in Writing Before You Do

Loan agreements between friends and family are the most common form of credit in the United States and the least likely to be written down. That is exactly why they end badly. The problem is rarely malice; it is that two people remember the same conversation differently, and a year later nobody can prove what was agreed.

Federal law does not require a written loan between two individuals. But the moment you lend money, you create a set of legal relationships — and the terms you did not discuss are the ones that will decide the dispute.

What a simple loan note should contain

You do not need a lawyer for a straightforward loan. You do need a page that answers seven questions:

1. Who is borrowing and who is lending — full legal names, not nicknames.
2. How much, written in figures and words.
3. When the money was or will be handed over.
4. Whether interest is charged, and at what rate.
5. How it gets repaid — a lump sum on a date, or instalments with amounts and due dates.
6. What happens if they are late — grace period, late fee if any.
7. Signatures and dates from both parties.

Handwritten is fine. Emailed is fine, though a signature is better. What matters is that both people can produce the same document later. One copy each.

Interest, and the state limits

If you charge interest, your state’s usury law sets a ceiling on how much. Those limits differ significantly — some states cap the rate explicitly, others only limit it for certain loan types, and enforcement varies. A rate that is comfortable in one state can be unlawful in another, and an interest rate above the cap is generally unenforceable in whole or in part.

If you do not mention interest, most states treat the loan as interest-free. That is the safe default between friends, and it avoids the usury question entirely.

Two tax points worth knowing, because they surprise people:

• Interest you receive is taxable income to you. If you are not charging interest, there is nothing to report.
• If you later forgive the debt, the forgiven amount may be taxable income to the borrower as cancellation of debt, with limited exceptions.

If there is no writing

An oral loan can still be legally enforceable, but your evidence is whatever you have: text messages, bank transfers with memos, emails, the other person’s partial repayments. Courts look at the pattern of conduct — a transfer with the memo “loan for car” followed by four instalments of the same amount is a strong trail.

Which is why a surprisingly effective first step is simply texting to confirm. “Just to be clear — I’m sending you $3,000 today, you’ll pay back $250 a month starting in March, no interest. Does that match?” A reply of “yes, that’s right” creates a written record both of you can point to. It is informal, and in most disputes over small sums it is enough.

The deadline nobody thinks about

Every state has a statute of limitations for suing on a debt, and it is measured from the date the debt became due. Written contracts typically get a longer window than oral ones — commonly several years for written and fewer for oral, though the exact periods vary by state.

Partial payment or a written acknowledgment of the debt can restart the clock in many states. So can a promise to pay. This cuts both ways: it is a reason to be careful about casually agreeing that you “still owe” everything, and a reason a lender should not let years pass without any written contact.

Once the limitations period runs, the debt does not vanish, but a court will generally not enforce it.

Getting the money back

For small amounts, small claims court is designed exactly for this. Every state has one, filing fees are low, lawyers are usually optional, and the monetary limits — the largest claim you can bring — vary from a few thousand dollars up to around $25,000 depending on the state.

The catch is that a judgment is not a payment. Winning establishes that you are owed; collecting means wage garnishment, a bank levy or a lien, each with its own state procedure. That is the real reason to write things down at the start: it makes both the lawsuit and the collection far simpler.

A short checklist

• Put the terms in writing, one page, signed by both.
• Keep one copy each, and keep the transfer record.
• If no interest is intended, say so explicitly.
• Avoid informal remarks that acknowledge or dispute the balance once the debt is in default — get advice first if a lot is at stake.
• Ask yourself whether you can afford to lose the money entirely. If you cannot, structured lending is better done through a bank.

Lending to someone you care about is a reasonable thing to do. Doing it without a page of paper is what turns a loan into a lost friendship.