The Loan Document

By far the best way to arrange a private loan is to have it documented. The best way to document a private loan is through a Promissory Note. Promissory notes are relatively simple documents and set out clearly the obligations of the borrower to repay the loan. They can be used for all types of loans including personal loans, business loans and secured loans such as mortgages.

There are three main reasons why you should document the loan.

To eliminate disagreements. The commitments between the borrower and the lender are clearly set out in the Promissory Note and disputes are readily resolved by referring to it.

To prove it is a loan. If the lender or the borrower passes away the Promissory Note will be needed in the settlement of the estate. Similarly if it is a loan to a business the document will be proof in a tax audit that that the funds are a liability and not income.

To deduct a loss. On the occurrence of a default, the lender could wish to deduct a loss against income. The ATO will require evidence of the loss and that that the lender took action to recover the loan.