Agreement Between Two Parties for Payment: Everything You Need to Know
An agreement between two parties for payment is also referred to as a payment agreement, promissory note, or installment agreement. 3 min read
Agreement Between Two Parties for Payment
An agreement between two parties for payment is also referred to as a payment agreement, promissory note, or installment agreement. It is a mutual understanding between such parties that payment will be made from one party to another. Generally, a payment agreement will be required for any type of loan given from one party to another.
Payment Agreement: An Overview
A payment agreement should always be in writing and include information regarding the type of payment to be given, when it should be given, how it will be paid, and what happens should the borrower default on the terms specified in the agreement.
This type of agreement can be found for any loan contract. For example, the loan will identify the principal amount of the loan, the interest rate, the term for repayment, and other important provisions in the event that the borrower defaults on the loan. This type of agreement could also be used by insurance companies that want customers to abide by certain repayment terms.
If you are wondering when to draft this type of agreement, you’ll want to consider it in any of the following circumstances:
- If you are loaning money to someone else, i.e. acting as a lender
- If you are borrowing money from someone else, i.e. acting as a borrower
- If you want to make a table of amortization
- If you want to record the amount of monthly payments and interest that you need to pay
Such an agreement is crucial so that both parties can fully understand their rights and responsibilities under the loan. Even if the loan is merely $100, a payment agreement should be immediately drafted to ensure that you, as the lender, will be repaid in a timely manner.
If the borrower fails to repay the loan, the other party can bring a lawsuit and use the payment agreement as proof that he or she should be repaid. If, however, the parties fail to draft the agreement, then the court might not find that a loan actually took place.
How Does a Payment Agreement Work?
Below are the steps to take when entering into a payment agreement:
- The borrower should request that the document be drafted
- Larger loans might require the submittal of a financial statement so that the lender will have proof that the borrower can repay the loan
- If the borrower’s request is approved, the lender will draft the agreement in writing
- The borrower might propose a repayment amount and specific payment schedule
- Once the agreement becomes final, the terms cannot be changed unless both parties agree in a subsequent writing
First, the borrower will need to submit an application of some kind, depending on the lender, for the loan. If the lender is simply another person or small business, then you might just need to e-mail them with such a request. For example, if you are seeking a loan from a financial institution, you will need to submit a formal application either on the bank’s website or via mail.
Keep in mind that, for larger loans, you might need to submit a financial statement, along with other documentation, proving that you can repay the loan. Using the same example above, if you are seeking a loan from a bank, you will need to provide recent paystubs, bank account historical data, and other documents to prove that you have sufficient funds to cover repayment of the loan. The bank will also obtain your credit report to confirm your financial history.
Once the lender has accepted your application, it will draft the formal payment agreement. Continuing with the bank loan example, the bank will now draft the agreement and send it to you. You could propose a repayment schedule and monthly repayment, but the lender doesn’t have to accept your proposal. Once you receive the agreement and sign it, the agreement will become final. Neither you nor the lender can change the terms unless such terms are agreed upon in a subsequent writing.
If you need help learning more about a payment agreement, or if you need an attorney to help you draft this type of agreement, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.