Whether you’re borrowing money from friends or family, or you’re the one doing the lending, a simple written IOU — officially called a promissory note — can save you a ton of worry.
As a Borrower
First, the most obvious reason to have a written agreement is to protect yourself regarding the amount owed. If you have no written agreement you won’t ever be able to prove that you’ve repaid the debt. If something happens to the lender, you need to have some proof of the amount, or risk getting sued for much more.
Second, you can get the terms in writing: like interest (or the lack thereof), how long you have to pay it back, whether the loan is secured by collateral, etc. It may seem more stressful somehow to have a written agreement (it makes the debt “official” instead of casual) but it can save you from much, much more stress in the long term.
Finally, as a borrower, it is of equal importance to get signed receipts for your payments (especially cash payments). Make sure to have the lender write “paid in full” on the receipt for the last payment.
As a Lender
If you are the lender, you have absolutely no excuse not to get the loan in writing. No excuse! The very act of getting the agreement in writing significantly improves the chance that it will be repaid in full. You owe it to yourself and your family to do this right. It might seem awkward to ask for a written promissory note, but you have to get in the habit. It protects the borrower and you.
If there’s a large amount of money at stake, get a lawyer to draft a simple promissory note. It’s inexpensive (I charge $150 for simple promissory notes) considering how much stress it will save in the long run.