Are you owed money or do you owe someone money? If you have seek enforcement on the owed amount, would an arbitrator, mediator, or judge agree that you are owed money? Do you have an “interest-free” loan? Do you know how much interest you can lawfully charge on a loan?

 

Lending someone money, whether it’s a family member, friend, business partner, or stranger, may seem a like a straightforward process. However, there are a lot of intricacies and safeguards to consider and put down in writing, such as the original sum, the accrual of interest, any collateral or security for the loan, the dates and amounts of repayment, and what should happen if timely payment is not made. A lender may end up in a state of financial hardship if the terms in the promissory note and repayment schedule are not written clearly. If the loan is not in writing, most commonly in the form of a promissory note and repayment schedule, then it may not be enforceable in court, especially if it is payable over more than one year.


Calculating and agreeing to an interest rate can also be complicated. In the eyes of the Internal Revenue Service, there is hardly ever such a thing as an “interest-free” loan. Should the IRS ever catch wind of your “loan”, they may go back, calculate their own interest rate, and assess income taxes on what they believe should have been interest income. Additionally, as a protection for borrowers, the government sets a maximum, annual interest rate that can be charged on certain types of loans.


Depending on how your promissory note and repayment schedule have been written, you may be charging an unlawful amount of interest per year, which may later affect your ability to enforce payment.


Both lenders and borrowers will benefit from clear terms documented in writing and the advice of an experienced business law attorney. Keep the loan mutually beneficial and prevent it from disintegrating into an acrimonious bad debt.


This portion of the site is for informational purposes only. The content is not legal advice.