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I am borrowing money (about $15,000) from a relative (parent). It is
unsecured (no collateral), for it pays off another (legal) debt whose
interest rate is fixed by statute at 10% per annum.
I want this loan to be more than a handshake, and I want it in writing,
but it will have some complicated terms (paragraphs), such as spelling
out the calculation of the payment.
You see, the loan will be a fixed term (4 or 5 years). A big reason for
this is that the lender:
* is 65 years old
* has been smoking for 45-plus years, and is not really in good health
* is married, and probably to a spouse who would not loan me the money if
she had inherited it
I want it paid off so at the very least it cannot be said I was being
irresponsible financially or that I was taking money and did not re-pay
because I assumed it was mine (or owed me as some form of inheritance).
I am even going out of my way to finance the re-payment creatively,
accounting for possible disastrous economic conditions.
That is, I want to peg the interest rate, adjusted annually or even semi-
annually, to some publicly posted rate that gives a fair return on a
similarly no-risk investment other than socking it away in a jar or under
the pillow. My guess is the lender is just storing the cash in a
checking account (perhaps interest-bearing).
My questions:
* What elements are required in a loan agreement or promissory notes
(free forms or examples on the net)?
* Anyone know of a good publicly posted index by which I can make the
interest rate adjustable?
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On Thu, 08 Jan 2004 21:50:38 GMT, SMZ <SMZ@noemailplease.no> wrote:
My questions:
* What elements are required in a loan agreement or promissory notes
(free forms or examples on the net)?
A note is about the simplest form of legal instrument there is. It's
simply a promise to pay a specified sum on a particular date or dates
(or on demand), with or without interest.
There can be additional wording about events of default, rights on
default, and other stuff, but it's not necessary to the enforceability
of the note, and if you are the borrower and not the lender, you
probably don't care. (Those provisions are usually for the benefit of
the lender.)
Because you have said you have some rather specific provisions in
mind, I'm not sure I would spend time looking for a form or model,
because anything you write that is clear and unambiguous will probably
suffice. (Ambiguities are the real problem, because as the preparer
of the note, any ambiguities will be construed against you. So be
clear and specific about how the interest is calculated--on a daily
basis, or on the basis of a month of 1/12th of the year, or
whatever--and when the payments are due.)
* Anyone know of a good publicly posted index by which I can make the
interest rate adjustable?
Although it was created for tax purposes, one published set of rates
that you might consider are the "applicable federal rates" under
section 1274 of the Internal Revenue Code. These rates are, for
example, the minimum rates that must be charged by family members in
order to avoid imputation of interest under section 7872.
There are many published sources, and I have my own archive of the
rates at http://evans-legal.com/dan/afr.html
(The rates are based on the yields on federal securities and are
redetermined by the IRS each month.)
**Dan Evans
**I post information, not advice.
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On Thu, 08 Jan 2004, SMZ <SMZ@noemailplease.no> asked/said in
pertinent part in substance:
I am borrowing about $15,000 from a parent
to be repaid within some stated (probably 4 or
5 year) fixed term to enable me to repay another
debt whose interest rate is fixed by statute at
10% annually and want this loan to be more than
a handshake.
Why not just use a promissory note, perhaps with an annexed/included
amortization table?
Whether the parent in question will want to write a will in a manner
that would reduce or forgive the loan is a decision s/he independently
can make.
I contemplated some complicated terms,
such as spelling out the calculation of the
payment, e.g., by pegging the interest
rate to some sort of publicly posted rate
that gives a fair return on a similarly no-risk
investment.
This statement begs the question why any sensible if also practical
person would want to specify a "complicated" interest rate calculation
provision for a loan of such a comparatively small amount payable over
such a comparatively short period (even if the lender is an elderly
individual in bad health who at least theoretically might die the day
after making the loan).
What elements are required in a loan agreement
or promissory notes (free forms or examples on the
net)?
You will find pretty uniform definitions and also forms for a variety
of promissory notes, the perhaps comparatively simple and most
widely-used form of agreement and, in so doing, that pretty much one
(short) sentence almost always suffices (e.g., something like, "For
fair consideration, receipt of which I acknowledge, I promise to pay X
in [stated municpality/state] the sums as and when stated on the
annexed rider; Jan. __, 2004; s/____ [amortizaton schedule, with or
without some also thereon stated adjustment formula, then annexed]).
* Anyone know of a good publicly posted index
by which I can make the interest rate adjustable?
Though, again, the nominal sums over the comparatively short period to
which you refer suggest that, as perhaps aggravated by the (here
ellided) emotional considerations to which you also referred, you
probably are making things much more complex than they ought be, among
(numerous) readily available examples of the sort of thing you suggest
you have in mind are stating in your note some greater or lesser
amount than
- the (so-called) "Prime Rate" (commonly referred to
as "the interest rate [said to be] charged by banks
to their most creditworthy customers"), published in
(among other sources) as published in the Wall St.
Journal and many other (very likely: including your
or the lender's local) newspapers,
- the rates peridically published by the IRS
pursuant to IRC 1274(d) (and see, id., 7520
and 7872), and
- one of the also commonly used "Consumer Price
Indexes" published by the U.S. Dept. of Labor (see,
www.bls.gov/cpi/home.htm),
and (especially if you really want things to be "complicated") you can
if you want devise formulae which account for all these categories.
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Dan Evans <dan@evans-legal.com> wrote in message news:<1hnrvv0ute60hdsge75i7oafpt1fkpl5kb@4ax.com>...
On Thu, 08 Jan 2004 21:50:38 GMT, SMZ <SMZ@noemailplease.no> wrote:
Because you have said you have some rather specific provisions in
mind, I'm not sure I would spend time looking for a form or model,
because anything you write that is clear and unambiguous will probably
suffice. (Ambiguities are the real problem, because as the preparer
of the note, any ambiguities will be construed against you. So be
clear and specific about how the interest is calculated--on a daily
basis, or on the basis of a month of 1/12th of the year, or
whatever--and when the payments are due.)
Here's one important ambiguity to watch out for:
In at least some jurisdictions, a provision for interest is deemed to
provide for simple interest unless there is express provision for
compound interest. That rule is at least somewhat dated -- I think
most people understand interest to mean compound interest these days
-- but the rule has held on in some places nevertheless.
(Simple interest = no interest on accumulated interest due. $1000
plus 10% interest for three years is $1300 if you calculate with
simple interest, and $1331 if you compound interest.)
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What conditions does a promissory note have to meet to be considered valid?
On Thu, 08 Jan 2004 21:50:38 GMT, SMZ <SMZ@noemailplease.no> wrote:
A note is about the simplest form of legal instrument there is. It's
simply a promise to pay a specified sum on a particular date or dates
(or on demand), with or without interest.
There can be additional wording about events of default, rights on
default, and other stuff, but it's not necessary to the enforceability
of the note, and if you are the borrower and not the lender, you
probably don't care. (Those provisions are usually for the benefit of
the lender.)
Because you have said you have some rather specific provisions in
mind, I'm not sure I would spend time looking for a form or model,
because anything you write that is clear and unambiguous will probably
suffice. (Ambiguities are the real problem, because as the preparer
of the note, any ambiguities will be construed against you. So be
clear and specific about how the interest is calculated--on a daily
basis, or on the basis of a month of 1/12th of the year, or
whatever--and when the payments are due.)
Although it was created for tax purposes, one published set of rates
that you might consider are the "applicable federal rates" under
section 1274 of the Internal Revenue Code. These rates are, for
example, the minimum rates that must be charged by family members in
order to avoid imputation of interest under section 7872.
There are many published sources, and I have my own archive of the
rates at http://evans-legal.com/dan/afr.html
(The rates are based on the yields on federal securities and are
redetermined by the IRS each month.)
**Dan Evans
**I post information, not advice.
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