Are you receiving a loan? Lending money to someone? If so, you could benefit from drawing up a contract agreement for payment. This document gets all the important details about the terms of your loan in writing. That way, you can make sure each party holds up their end of the contract.
Not sure how to create a payment agreement? We’ll navigate you through the entire process from start to finish.
What is a Payment Agreement Contract?
A payment agreement contract is a document that includes important details about the terms and conditions of a loan. Within a payment contract, you outline money that someone owes to you or money that you owe to someone else. This gives you full visibility into the amount of the loan, the interest rate, the repayment terms, and other key details.
The main benefit of using a payment agreement contract is that you get all the important details of a loan in writing. That way, if either party fails to abide by the terms of the loan, they’ll be held in breach of contract. This ensures protection for both parties.
So, by having everything documented, you can get peace of mind when your money is involved, whether you’re the lender or the borrower.
When should you use a contract agreement for payment? You might need a payment agreement for a variety of reasons, including:
- When you’re borrowing money
- When you’re lending money
- When you’re preparing an amortization schedule (a table that shows the schedule for paying off a loan)
- When you’re trying to figure out and document the number/amount of monthly payments and interest you have to pay on a loan
Types of Payment Contracts
Before creating a payment contract, it’s important to understand what the different types are, which include:
- Business payment contract: If you’re a business owner, you’re probably involved in creating multiple types of documents. This likely includes a business payment contract. Within this contract, you outline the service/product or loan you provide and your expectations for the client/borrower to make payments.
- Personal payment contract: Not operating as a business? Then, it’s likely that you need a personal payment contract, which usually handles smaller transactions. These contracts are often less complicated than business payment contracts and don’t require as many specifications. Plus, personal payment contracts typically involve direct payments.
- Installment payment contract: Need a payment agreement that outlines a payment plan? An installment payment contract might be ideal for this situation. With this type of contract, you can outline the number of payments, the amount of each payment, and how much interest will be applied during the agreed-upon payment schedule.
Elements of a Payment Agreement
Not all payment agreement contracts are created equal. So, they may differ in any given situation. However, they all typically include the same key elements, such as:
- Consenting parties: This section outlines who’s involved in the contract.
- Agreed-upon terms: This section usually takes up the most space in the contract. That’s because it details what both parties have agreed to in terms of payment. It might also include any products or services that you or the other party might provide.
- Date of the contract: By dating the contract, you’ll have proof of when it officially went into effect.
- Balance: This shows the total amount that either you or the borrower owes, along with any specifics of that balance, what it’s for, and other details about the amount.
- Repayment: This is one of the most important parts of the payment agreement because it outlines the terms of repayment. Depending on your situation, this could be a lump sum of money, monthly payments, etc. The repayment section should also outline interest and any other charges.
- Late payments/prepayments: Are there any penalties for late payments? If so, you’ll include them here. If you don’t point these out in the contract, they won’t be enforceable.
- Default: It’s important that the client or borrower understands what happens if they default on the payment.
- Amendments: Contracts can change. But they can’t if no amendments are included. For example, the borrower might try to extend the payment plan. As the lender, you can add a clause in the contract that requires all parties to sign off on the new terms of the agreement.
- Signatures: Once the contract is written, each party must sign it in order to make it official. Signatures are important because they indicate each party agrees to the terms and will commit to performing the obligations outlined in the contract. The result? You have a legally binding contract.
How to Write a Simple Contract Agreement for Payment Step-by-Step
There are a few ways to draft a payment contract. For example, you can use a template that provides the basic elements of the contract and even all the necessary wording to make it a cohesive, legally binding document. From there, you just fill in the template to your specifications to ensure it meets your unique needs.
Even though a template can make creating a payment agreement contract easier, it’s not necessary to use one. You can create a simple payment contract with these steps:
- Look for examples of payment agreement contracts online. Use them as a guide to create your own. Chances are, your contract will look different from the ones you come across because every industry and situation is different.
- Format your document. Use Microsoft Word or your choice of word processing software to write your draft. Make sure you use a professional font that’s clear and legible.
- Write your title. Add a title in bold and/pr in all caps so that it stands out. Consider making your title font bigger than the rest of the text in the document. Use an appropriate title, like “Payment Agreement” or “Loan Agreement”.
- Outline the parties involved in the agreement. Who is the person making the loan? Who’s the borrower? Make it clear who’s supposed to be paying what, what products/service will be provided, etc. State what each side agrees to do.
- Clearly write out the terms of the loan. Include information about the date of the loan, the payment terms, interest, schedule of payments, late charges, default, and any other details in the agreement.
- Explain that the contract represents the entire agreement. This will just state that the written payment agreement replaces any previous discussions, understandings, or agreements, whether oral or in writing. As a result, you can prevent any misunderstanding or miscommunication.
- Add spaces for signatures. A written contract isn’t legally binding without a signature. So, make sure you provide spaces that allow each party to sign their name. There should be enough room for them to write their name, title, and date.
Start Writing Payment Agreements Today
Payment agreements are an important part of doing business. If you’re a business owner, you need them to render services to clients or debtors. As an individual, you may need to draft a private agreement to make sure a friend or family member holds up their part of the deal. Whatever the case, a payment agreement can protect you in case things go wrong. And it also wouldn’t hurt to consult a lawyer to make sure your contract is good to go.
But the agreement isn’t valid until both parties sign. Create, collect, and manage signatures with ease using an electronic signature solution like jSign. Sign up for your 14-day free trial today.