Payment Plan Contract: Everything You Need to Know
A payment plan contract is a document that outlines the important conditions of a loan and states the responsibilities of both the borrower and the lender.3 min read
A payment plan contract is a document that outlines the important conditions of a loan and states the responsibilities of both the borrower and the lender, ultimately setting legal expectations on both ends.
Payment Agreement Basics
A payment agreement lists all the crucial terms for a loan. It shows that you are acknowledging the conditions that come with the loan, no matter if you are the lender or borrower of the money.
A payment agreement document is important if:
- You are borrowing money.
- You are lending money.
- You are creating an amortization table.
You need to keep track of and calculate monthly interest, as well as payments.
A payment agreement is a crucial starting point for when you think about loaning money. There can be a lot of information involved, but a loan can also be made simple. Organization is the key to avoiding confusion and problems in the long run. When a payment agreement your money is involved in all of a sudden is breached, personal protection is essential. Hence, all terms and conditions should always be stated in written form, which helps with peace of mind, no matter if you are lending or borrowing money.
A loan does not have to be complicated, and the first step toward a smooth process is a carefully drafted payment agreement.
Why Make a Payment Agreement Contract?
A well-drafted payment agreement can serve as valuable evidence in case it comes to a lawsuit. This usually happens when the person who has borrowed money does not follow the expectations outlined in the contract, so suing the borrower is the only way the lender can potentially get paid.
No matter if you know the person well or not, a valid payment agreement is vital for a smooth loan process. Loaning money is always treated as a business transaction. Having a carefully drafted contract is helpful to avoid any misunderstandings. It also protects both the person who borrows and lends money.
Lenders are required to have proof of the loaned sum, as well as proof of the borrower agreeing to repay the loaned money in full. On the other hand, the person borrowing money may ask for proof of the total sum that is being lent to him or her. This is so the borrower is protected in case the person lending money tries to claim a higher amount in the future.
As proof of both parties agreeing to what is stated in the contract, a notary public can be present upon signing. A small fee may be required. Should the notary public not be an option, other witnesses can certify the truthfulness of your signatures. Both parties ideally get a copy of the contract for their records.
How to Make Your Own Payment Plan Agreement
When creating your own payment plan, follow these steps:
- Search for an online template. They can be different, so comparing contracts is advisable.
- Change the agreement so it meets your requirements. Professional fonts are best. Keep your fonts bigger so you can catch possible spelling mistakes while making changes.
- A margin of one inch on all sides is ideal.
- Choose the title of your document, which should be "Payment Plan" or "Payment Plan Agreement," written in bold, capital letters and centered.
- The first paragraph should contain the date, as well as the names of both the person lending and borrowing money.
- Terms of Consideration should be next, as those are showing that there is an agreement between the two parties in that one person lends money under certain conditions that, in return of borrowing the money, have to be fulfilled by the borrower.
- The following paragraph should outline in detail the numbers, including the total amount of the money lent, payments, penalty rates, as well as interest. This helps to keep all parties of the contract on the same page.
- Dates of all payments, including full payment, need to be specified.
- An option of prepayment is advisable, as the borrower sometimes is able to pay off the loan quicker than initially expected.
- Sometimes, the borrower is not able to make the payment on the date stated in the contract. For this case, the penalty rates need to be clearly outlined so he or she knows exactly what penalty amount can be expected.
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