Verbal Debt Agreement

Verbal Debt Agreement: Understanding How It Works

When it comes to borrowing money or taking out a loan, it`s essential to have a written agreement in place that outlines the terms and conditions of the loan. However, in some cases, a verbal agreement may be made between the lender and borrower, known as a verbal debt agreement.

What is a Verbal Debt Agreement?

A verbal debt agreement is an agreement between the borrower and lender that is made verbally or through phone calls, emails, or text messages. It`s an unsecured loan that doesn`t involve written documentation, such as a promissory note or loan agreement.

In a verbal agreement, the borrower agrees to repay the loan amount, and the lender agrees to provide the funds. The payment schedule and interest rate are also discussed and agreed upon verbally.

It`s important to note that verbal agreements are not legally binding, and there`s no guarantee that the borrower will repay the loan amount. In case of default, the lender will have no legal recourse to recover the money, as there is no written documentation to support the claim.

When are Verbal Debt Agreements Used?

Verbal debt agreements are usually used in situations where the loan amount is small, and the borrower and lender have a pre-existing relationship, such as between friends or family members. It`s also common in situations where the borrower needs money urgently and doesn`t have time to go through the formalities of a written agreement.

However, it`s always advisable to have a written agreement, no matter how small the loan amount is, to avoid misunderstandings and issues down the line.

What Should be Included in a Verbal Debt Agreement?

While verbal debt agreements are not legally binding, it`s still important to discuss and agree upon various terms and conditions to avoid any confusion or potential problems. Some of the things that should be discussed and agreed upon in a verbal debt agreement include:

– Loan amount: The amount that the borrower is borrowing from the lender.

– Interest rate: The rate at which the borrower will be charged for borrowing the money.

– Payment schedule: The frequency and amount of payments the borrower will make to repay the loan amount.

– Late payment fees: The amount the borrower will be charged if they fail to make payments on time.

– Collateral: If the loan is secured, the collateral that the borrower will put up as security for the loan.

– Default consequences: The consequences of defaulting on the loan, such as additional fees or legal action.

Conclusion

While verbal debt agreements are not legally binding, they can still be useful in situations where a formal written agreement is not possible. However, it`s always advisable to have a written agreement, no matter how small the loan amount is, to avoid confusion and potential issues down the line. When entering into a verbal agreement, it`s important to discuss and agree upon various terms and conditions to avoid any misunderstandings or potential problems.