If you are borrowing money from a friend or business associate, it is wise to have a written Promissory Note defining the extent of your obligations; likewise if you are loaning money to a friend, you should have a Note. The Note should state how much money was borrowed, how much interest is being charged and when the debt is to be paid. If the terms are that the loan is payable upon demand, this means whenever the lender wants to demand full payment, including any accrued interest, he can do so. The Note should specify how the lender makes demand. The loan may also be payable in full at a specific time, known as a balloon payment, or may be paid in monthly payments similar to a car payment or mortgage. Those details should be specifically set forth in the Note.
Under New Hampshire law, if there is interest charged under the Note, the Note should specify whether there is any prepayment penalty. If the Note is silent on that issue, the borrower, upon paying off the Note early, may still have to pay the interest that would have been accrued over the term of the Note. This is why it is usually standard to have a provision in the Note stating there is no prepayment penalty.
Lastly, the lender should insist on a provision in the Note stating that if he has to hire an attorney to pursue collection of the Note that he will recoup his attorney’s fees from the borrower in addition to the amount loaned plus interest. Such an attorney fee provision not only may help the lender recoup those expenses, but it will also increase the likelihood that if the borrower is having financial troubles he will still have the incentive to pay his loan in full to the lender before he hires an attorney.
Generally, it would be prudent to speak with an attorney to have this loan put in writing. This is a relatively simple procedure and may save you substantial headaches later, whether as the borrower or the lender, because both of you will know your respective rights and obligations.
J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].