Traditional wisdom tells us never to lend money to friends. But traditional wisdom has it slightly wrong. Lending money and property to friends is okay, as long as you feel comfortable with the arrangement and get it in writing. That’s right—signing on the dotted line isn’t just for men in suits; making contractual agreements is important in your personal life as well. In their book, Put It in Writing!: Creating Agreements Between Family and Friends, Deborah Hutchison and Divorce Court judge Lynn Toler give us the nitty-gritty on when and how to draw up written contracts.
Why Write It Down?
You wouldn’t enter into a business deal without a written contract, so why would the rules change once friends and family members become involved? If anything, these relationships require the greatest protection against misunderstanding because they are the most important. We should turn to those close to us for help when we need it, but we also need to keep things clear.
As anyone who maintains a journal knows, writing things down helps us understand our feelings. For both you and your partner in the agreement, exploring the consequences and intricacies of an arrangement through writing gets you thinking about these elements in ways that you might not if you didn’t put pen to paper. Asking someone to sign his or her name to an agreement also reveals how committed the person is to its terms. If you’re not sure that Uncle Bob really intends to pay you back that $50, whether or not he gives you his John Hancock can be a good (though not foolproof) gauge of his sincerity.
Contracts aren’t just for lending money, either. Hutchison and Toler recommend written agreements for all kinds of social situations, including loans, house sharing, parenting, and splitting the care of aging parents with siblings.
How to Start
Hutchison and Toler stress the importance of approaching written agreements in a nonconfrontational way. You want the other parties to understand that your desire to draw up a contract is not based on mistrust—you just want to avoid misunderstandings by creating a record of the deal.
If you are the person requesting the agreement (e.g., asking for a loan), you should insist on a written agreement, even if the other person doesn’t feel it’s necessary, since it protects both of you, not just the person providing the loan. It behooves you just as much as, if not more than, it does the other person to keep track of the amount you owe and when you need to pay it back.
What to Include: The Basics
According to Hutchison and Toler, every contract should include these basic elements:
- All parties’ full names and signatures with dates
- The specific terms of the agreement, including accurate descriptions of property value and condition, exact amounts of money exchanged, deadlines for payback, and periods of loans
- How to keep track of progress, and when and how parties should communicate
- Expect the unexpected. What happens if one party doesn’t or can’t adhere to the contract? What happens if loaned property is damaged, lost, or stolen? Try to think of everything that might affect your arrangement, from human fallibility to acts of nature, and come up with contingency plans.
You may choose to have your contract witnessed or notarized, but that layer of formality is not necessary for the agreement to be binding.
What to Include: The Details
In their book, Hutchison and Toler include several chapters of specific arrangements and their applications. You can adapt the basics above for any purpose, but here are some additional considerations pertaining to everyday agreements among friends and family:
- For a monetary loan, include sections in your contract that detail the consequences if the recipient fails to repay the loan, the manner of repayment (e.g., an installment plan, including a timeline), and how and when to notify each other about late or missing payments.
