There are many instances when one party will owe money to another party, and both may benefit from drafting a formal agreement that outlines all of the agreed upon terms. A contract for payment, otherwise known as a promissory note, is a formal document that clarifies the payment terms regarding funds owed from one party to another.
It generally will indicate the full amount that is owed, the terms of payment, the actions that can be taken if the promissor defaults on the payments and who the promissor and payee are.
You should be aware that the document is legally binding, and because of this, it can be used as evidence if a default issue escalates into a legal matter. By following these important steps, you can more easily draft an effective contract for payment that is agreeable to both parties.
Identify the Terms of the Agreement
Depending on the circumstances, the payee may define all of the terms of the promissory note, or there may be some flexibility regarding the payment arrangements that can be negotiated. Both parties will need to agree to the terms in the agreement, so it often is beneficial to outline and discuss the terms up-front.
For example, the amount owed is often not negotiable, but the exact payment due date may be. It is in the best interest of the payee to agree to terms that are easy for the promissor to make, and this is because there is less of a chance for the promissor to default if the payments are affordable and are due at the most ideal time of the month for that individual. These should be defined before you sit down to draft the agreement.
Be Clear About the Purpose of the Contract
The best contract is one that clearly defines the purpose of the document. Ideally, the header will indicate a term such as “Payment Agreement” or “Contract for Payment.”
This clarifies the nature and intent of the document and ensures that there is no confusion about the type of agreement that the two parties are entering into. When you begin drafting the agreement, it may be best to include this information at the top of the document and perhaps center it on the page in large, bold font.
Include Dates on the Agreement
There are several dates that must be included in the agreement. First, both parties should sign and date the agreement for the date that the terms were agreed upon, so you should include a space for this information to be written in by the signors.
Second, the start date for the first payment should be detailed, and the dates of subsequent payments should also be defined. There often is a clause in the agreement regarding late payments. For example, the agreement may state that payments are late after four or five days after the due date.
Define the Payment Terms and Default
In addition to the payment due dates, the other payment terms should be discussed. For example, if there is a late fee that is due after the grace period, the amount of the late payment and the payment terms for this amount of money should also be defined.
Additional information should be noted in the agreement regarding default of the loan terms. This may outline when the account will be placed with collections or the additional steps that you may take to collect funds that are owed in the event of a default.
Sign and Date the Agreement
After the document has been drafted, you may consider having a lawyer review it . This is a legal document, and both parties may consider learning more about their obligations under the contract.
In some cases, slight revisions to the wording may benefit one or both parties, and an attorney can provide you with more insight about this after reviewing the document. When both parties agree to the contract, it will need to be signed and dated.
After the document has officially been signed by both parties, it will be active. The terms will be in full force, and a separate document will need to be drafted to nullify the first one.
There are many reasons why you may owe someone money. For example, you may purchase a more expensive item from them and may want to make convenient monthly payments.
formal legal document
Perhaps you need to borrow money from a friend or family member and want to create a formal document that protects you both. A contract for payment is a formal legal document, and by signing the document, the promissor will be legally obligated to make payments to the payee according to the agreed upon terms.
There are examples of promissory notes online that you may use for inspiration, but follow these tips to ensure that your document includes all of the pertinent information.
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