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Promissory note money transfers

Secure repayments when lending to friends and family overseas

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Straighten out potentially confusing repayments from loved ones abroad with a simple tool.

It’s a tricky situation when you’re asked to lend money to friends or family outside the US. There’s the logistics of getting the funds there in a way that’s most convenient for your recipient. But you’ll also want to prevent potential problems by hammering out repayment details.

If drawing up a contract isn’t something you can stomach, you have a simpler way of recording your loan through a promissory note. This informal IOU is a legal lending document whereby one party promises to repay another on or by a specific date.

Here’s how to put one together to safeguard your lending — and your relationships.

What is a promissory note?

A promissory note is a document that records agreed-on terms involved in providing a loan to someone who lives outside of the US. It’s sometimes called a loan agreement.

You’ll find many templates online that can guide you through creating a promissory note. But your most basic note will include:

  • The total amount you’re lending. Also called your principal.
  • A schedule for expected repayments. Include installments, a lump sum or some other way all parties agree.
  • A projected payoff date for the loan. This is the date your loan is satisfied.

If you choose to charge interest for the loan, you’ll want to include the rate you’re applying and maybe a breakdown of payments by principal and interest for clarity. More formal promissory notes might include an amortization table showing the principal and interest due each month over the life of the loan.

Tips on putting together a promissory note

When creating a promissory note, your intent to clarify the terms and conditions of the money you’re lending to avoid any future frustrations.

Keeping that in mind:

  • Be specific and detailed. Don’t be vague about amounts, terms or repayment dates. And if you expect a lump-sum payment, include how much and when.
  • Have all parties sign it. A promissory note without signatures isn’t helpful — or legal. Witness signatures add credibility.
  • Consider a notary. A notarized promissory note is legally enforceable. And a notary can serve as a both a witness and endorser, should the need arise.
  • Include recourse for nonpayment. Not an easy conversation, but discuss what happens if your borrowers doesn’t pay you — additional costs, extended terms or even legal action.

Are there any tax implications to a promissory note?

A promissory note not only reiterates to each party that the loan is just that — a loan, and not a gift. But it also provides clear proof to the IRS that you aren’t gifting money.

To decide not to charge interest to your loved ones is noble. But if you’re lending more than $14,000, the IRS might consider your loan a gift anyway, subjecting the full amount to the gift tax.

If you are charging interest, you’ll likely need to report the interest you earn to the IRS. This is because all loans — among loved ones or lenders, domestic or international — are subject to the same interest-related rules.

These rules can be complicated to untangle. If you’re unsure about the tax implications on your specific loan, discuss it with your accountant ahead of time.

How should I receive repayments?

Even under existing US rules and regulations, you have a lot of freedom in establishing how you’d like to be paid back.

Consider repayments through an international money transfer. Many online money transfer specialists can save your loved ones money and time when repaying your loan.

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