A Family Loan Agreement Is Five Things. Most People Skip Three of Them.

The loan conversation usually goes fine. Someone needs money. Someone else has it. Terms get discussed — or sort of discussed. Money moves. Everyone feels good about it.

Then nothing gets written down. Because it's family. Because it feels formal. Because the terms seem so obvious that putting them on paper feels like implying you don't trust each other.

We understand. But here's the thing: an agreement isn't about trust. It's about two people working from the same document instead of two different memories, over however many years the loan runs. That's a kindness, not a formality.

Here are the five things a family loan agreement actually needs. None of them are complicated. Together they take about fifteen minutes.

1. The names and the exact amount

State the full legal names of both the lender and the borrower. State the exact dollar amount. Not "around $15,000" — the number that actually transferred.

The transfer itself should leave a trace. A bank wire, a check, a payment app with a clear memo. Cash is harder to defend later if anyone ever questions whether the loan happened. If you move money in a way that creates a record, you've already handled most of this step.

2. The interest rate (the one people skip)

Charging your kid interest feels strange. We know. But for loans above $10,000, the IRS requires an interest rate at or above their published minimum — the Applicable Federal Rate, or AFR. Charge less than that, and they can impute income to you: tax you on interest you never collected.

The good news is that the rate is usually small, and following it makes the question disappear entirely. Look up the current AFR at irs.gov, pick the rate for your loan's term (short-term is under 3 years, mid-term is 3–9, long-term is over 9), and write that number into the agreement. It locks in at the start and doesn't change over the life of the loan.

We've got a fuller breakdown of how the AFR actually works — and why it's less scary than it sounds — here. The short version: write a number down, charge at least the AFR, and the IRS is no longer a player in your loan.

3. A real repayment schedule

"Pay me back when you can" is not a repayment schedule. It's an intention. And intentions are fragile over years, across job changes and new babies and everything else that happens to a family.

The agreement needs to say: the payment amount, the due date, the number of payments, and what the balance will be at the end. Monthly is most common. Annual payments work for some families. What doesn't work is vague.

If you want flexibility built in, put it there explicitly. "If a payment is more than 30 days late, the lender and borrower will agree together on a revised schedule" is a perfectly reasonable clause. Say it in the document instead of assuming it.

4. What happens if something goes wrong

Nobody likes writing this part. Write it anyway.

You don't need a lawyer to draft it. A sentence or two is enough: what counts as a default, what happens to the remaining balance if the borrower dies, whether there's a grace period before a late payment becomes a problem.

The goal isn't to threaten anyone. It's to answer hard questions before they become hard conversations. Families that agree on this in writing, in advance, don't have to figure it out later in a harder moment.

5. Two signatures and a date

Both people sign. Both people keep a copy. Somewhere findable — not in a drawer nobody opens until someone dies.

For larger loans (a house down payment, business capital, anything north of $50,000), a notarized signature adds real weight, and a lawyer's hour is cheap relative to what it protects. For most family loans, two signatures and a date is enough.

The ongoing part, which is where most family loans actually fall apart

The agreement is the starting line. The record is the race.

Every payment needs to be logged: date, amount, method. The balance needs to update. Both people should be able to see where things stand at any time — not buried in a spreadsheet, not reconstructed from bank statements, just visible.

This is where the wheels come off. The agreement gets signed, a few payments get made, the tracking quietly stops, and a year later nobody's sure what's been paid or what's still owed. The conversation gets awkward. Relationships get strained. Over something that could have been a clean, simple record. (Here's the longer piece on what actually goes wrong when a family loan isn't documented — it's the consequences companion to this checklist.)

The solution isn't more paperwork. It's a system that does the tracking without anyone having to remember to do it.

In summary

Five things: full names and exact amount, an interest rate at or above AFR, a real repayment schedule, a default clause, and two signatures. That's the whole document.

Most of what goes wrong with family loans goes wrong because one of these was missing — usually the rate, the schedule, or the ongoing record. Most of what goes right goes right because someone wrote it down once and kept up with it.

BankOfGaga sets all of this up in about five minutes, handles the AFR math so you don't have to look anything up, and keeps a running record both parties can see at any time. Try it free for 3 days →

Write it down. Both of you. Once.

---

Nothing here is legal or tax advice. If your situation involves an estate, a Medicaid question, or a large loan, a lawyer or CPA is worth the call.