Personal Loan Agreements Between Friends: How to Do It Right

"Neither a borrower nor a lender be," Shakespeare wrote. It's great advice that almost nobody follows. Friends lend money to friends all the time — for rent, car repairs, business ideas, medical bills, or just getting through a tough month.

The problem isn't the lending. It's the not writing anything down part. A personal loan without a written agreement is a friendship stress test, and most friendships aren't as strong as people think when money is involved.

Here's how to do it right.

Why You Need a Written Agreement

"I trust them" is not a financial plan. Here's what a written agreement actually does:

Removes ambiguity. Is it a loan or a gift? When is it due back? In what amounts? A written agreement makes these things explicit.
Protects the friendship. Most money-related friendship damage comes from mismatched expectations, not malicious intent. Writing things down prevents that.
Creates accountability. Repayment is easier to track and follow through on when there's a written record.
Provides legal protection. If things go south, a written agreement is evidence that money was lent, not given. This matters if you ever need to pursue repayment formally.

For more on why putting things in writing matters, see why verbal agreements fail.

Before You Lend: Questions to Ask Yourself

Before writing any agreement, honestly evaluate whether this loan is a good idea.

Can You Afford to Lose This Money?

This is the most important question. Regardless of the agreement, there's always a chance you won't get the money back. If losing this amount would cause you financial hardship or lasting resentment, don't lend it.

The classic advice applies: never lend more than you'd be willing to give as a gift.

Is This a Pattern?

Is your friend frequently in financial trouble? Have they borrowed from others? Do they have a plan to change their situation, or is this a band-aid? Lending money to someone in a chronic financial crisis rarely solves the problem — it just delays it.

What's Your Real Motivation?

Are you lending because you genuinely want to help, or because you feel guilty saying no? Because saying yes out of guilt usually leads to resentment, which is worse for the friendship than saying no.

Have You Considered Alternatives?

Could you help in other ways — connecting them with resources, helping them budget, offering practical support that isn't cash? Sometimes the most helpful thing isn't money.

What Your Loan Agreement Should Include

If you decide to proceed, write it down. Here's what to cover:

1. The Basics

Full names of the lender and borrower
Date of the agreement
Loan amount (exact figure)
Purpose of the loan (optional but useful for context)

2. Repayment Terms

This is the most critical section. Be specific:

Total amount to be repaid (same as loan amount, unless you're charging interest — more on that below)
Repayment schedule: Lump sum by a specific date? Monthly installments? Weekly?
Payment amounts: How much per installment?
Start date: When does the first payment happen?
End date: When should the loan be fully repaid?
Payment method: Cash, bank transfer, payment app, etc.

Example: "Borrower will repay the full amount of $2,000 in 10 monthly installments of $200, beginning June 1, 2025, and ending March 1, 2026. Payments will be made via Zelle by the 1st of each month."

3. Interest (If Any)

Most friend-to-friend loans don't include interest, and that's fine. But if you choose to charge interest:

State the rate clearly
Calculate the total repayment amount including interest
Be aware of usury laws in your jurisdiction — charging excessive interest is illegal

Note: For loans above certain thresholds (currently $10,000 in the US), the IRS may impute interest even if you don't charge any. This means they'll treat the loan as if interest was charged and tax you accordingly. Consult a tax professional for large loans.

4. What Happens If Payments Are Missed

Address this upfront, while everyone is still friendly:

Grace period: Is there a window after the due date before a payment is considered late? (5-7 days is common)
Communication expectation: The borrower should notify the lender in advance if they'll miss a payment.
Adjustment process: Can the repayment schedule be renegotiated if circumstances change?
Consequences: What happens if multiple payments are missed?

Example: "If a payment will be late, Borrower will notify Lender at least 3 days before the due date. A grace period of 7 days applies. If three consecutive payments are missed, both parties will meet to discuss revised terms or an alternative repayment plan."

5. Early Repayment

Can the borrower pay it back faster than scheduled? Generally yes, and you should encourage it. But state it explicitly:

"Borrower may make additional payments or repay the full remaining balance at any time without penalty."

6. Documentation

How will payments be tracked?

A shared spreadsheet or document
Payment app records
Written receipts
A simple log maintained by both parties

Having a record both people can access prevents "I already paid that" disputes.

7. What Happens If the Friendship Changes

This is awkward to discuss but important. The loan obligation should survive changes in the friendship:

"This agreement remains in effect regardless of changes in the personal relationship between Lender and Borrower. The obligation to repay is independent of the friendship."

A Complete Template

PERSONAL LOAN AGREEMENT

Date: [Date]

Lender: [Full Name]
Borrower: [Full Name]

LOAN DETAILS
Amount: $[Amount]
Purpose: [Brief description]
Date of disbursement: [Date funds are/were transferred]
Method of disbursement: [How the money was/will be given]

REPAYMENT TERMS
Total to be repaid: $[Amount, including interest if applicable]
Repayment schedule: [Monthly/weekly/lump sum]
Payment amount: $[Per installment]
First payment due: [Date]
Final payment due: [Date]
Payment method: [How payments will be made]

LATE PAYMENTS
Grace period: [X] days after due date
Notification: Borrower will inform Lender at least [X] days
  in advance of a late payment
Missed payment process: [What happens]

EARLY REPAYMENT
Borrower may repay early without penalty.

TRACKING
Payments will be tracked via [method].
Both parties will have access to the payment record.

GENERAL TERMS
This agreement is binding regardless of changes in the
personal relationship between the parties.

If any dispute arises, both parties agree to attempt
resolution through direct conversation before pursuing
any other action.

SIGNATURES
Lender: _________________ Date: _________
Borrower: _________________ Date: _________

Tips for Making It Work

Have the conversation in person. Don't just hand someone a document. Talk through the terms together. Use the agreement as a conversation tool, not a gotcha.

Be matter-of-fact, not apologetic. Framing it as "I always do this when lending money" makes it less personal than "I'm worried you won't pay me back."

Set calendar reminders. Both of you should have reminders for payment dates. This reduces the awkwardness of having to ask.

Acknowledge good faith. When payments come on time, a simple "got it, thanks" goes a long way toward keeping things positive.

Know when to forgive the debt. If repayment is clearly not going to happen and the friendship matters more to you than the money, consider forgiving the remainder. Sometimes cutting your losses is the healthiest option for both the friendship and your mental health.

Disclaimer: This article provides general guidance for informal personal loans. It is not legal or tax advice. For large loans or complex situations, consult a licensed attorney or tax professional in your jurisdiction.

For more on different types of casual agreements, visit the types of casual agreements hub. For related financial guidance, see the financial boundaries hub.