Why it is Important to have a Loan Agreement/Promissory Note?

When lending money, as with any contract, it is important that the parties execute a written agreement setting forth their rights and obligations. In the case of a loan the parties would execute a Loan Agreement and, when the loan is actually made the borrower would be required to sign and deliver to the lender a Promissory Note evidencing that the loan has actually been made. Absent a written agreement there may be no clear evidence as to the loan terms, such as the rate of interest, when the loan is to be repaid, what law governs and what happens if an interest or principal payment is missed. In fact, without a loan agreement the borrower might even try to argue that the funds advances were meant as a gift.

In addition to the terms mentioned above a lender will also want the loan agreement to (i) specify whether the loan can be prepaid, (ii) provide for a higher rate of interest should a default occur, (iii) clearly set forth what events constitute a default by the borrower, and (iv) include a provision requiring a defaulting borrower to pay the legal fees incurred by the lender in enforcing its rights under the loan agreement.

If you wish to learn more about loan agreements and promissory notes please contact Stephen Goldstein at Sgoldstein@sgoldlaw.com, or at (212) 586-5555.