To write a contract between friends, put the deal on paper with each person’s full legal name, a precise description of what’s being exchanged, dates, each party’s responsibilities, how disputes will be handled, and signatures from both of you. A handshake can be legally binding, but proving what you agreed to months later is the hard part. The document doesn’t need to look like a lawyer drafted it; it needs to capture the terms clearly enough that a stranger reading it could tell exactly who owes what to whom and when.
When the Law Requires Writing
For most small arrangements between friends, writing is optional as a legal matter. But a doctrine called the statute of frauds makes a signed writing mandatory for certain categories of deals. If your agreement falls into one of these and you rely on a handshake, a court can refuse to enforce it at all:
- Any sale or transfer of land or an interest in land.
- Any agreement that cannot be fully performed within 12 months of being made.
- Sales of goods priced at $500 or more, under the Uniform Commercial Code.1Legal Information Institute. UCC 2-201 Formal Requirements Statute of Frauds
- A promise to pay someone else’s debt to a third party.
The writing itself doesn’t have to be formal. It needs to contain the essential terms and show that both parties intended to be bound. Emails or text messages can satisfy the requirement in many jurisdictions.2Legal Information Institute. Statute of Frauds
Even when the law doesn’t require writing, write it down anyway. A signed document is far easier to prove than a conversation, and the exercise of writing forces both of you to confront details you might otherwise skip.
The Elements That Make It Enforceable
A friendly agreement only becomes a contract if it contains the pieces courts look for. Miss one and the whole thing can collapse:
- Offer and acceptance. One of you proposes specific terms; the other agrees to those terms without changing them. “Sure, I’ll help you out sometime” doesn’t count.
- Consideration. Each side has to give up something of value — money, a service, a promise to do or not do something. A one-sided promise with nothing coming back is a gift, not a contract.
- Mutual assent. Both of you understand and agree to the same terms. If one friend thinks the money is a loan and the other thinks it’s a gift, there’s no meeting of the minds.
- Capacity. Each party has to be at least 18 and mentally competent. Contracts signed by minors are generally voidable at the minor’s option.
- Legal purpose. The agreement has to involve something lawful.
Consideration is where contracts between friends most often fall apart. A loan with no repayment schedule and a vague “pay me back when you can” may be too indefinite to enforce. Be specific about what each person is giving and getting.3Legal Information Institute. Contract
What to Put in the Document
Every contract between friends should cover these basics, regardless of what the deal is about:
- Full legal names and current contact information for both parties. Use the names on government ID, not nicknames.
- A precise description of what’s being exchanged. For a loan, that means the exact dollar amount, interest rate (or a statement that no interest will be charged), repayment schedule with specific due dates, and consequences for late payment. For a service, describe the work, the timeline, and what counts as finished.
- Each person’s responsibilities, spelled out. Don’t assume anything is obvious. If you’re splitting a shared purchase, state who pays what, who maintains it, and who gets it if the arrangement ends.
- Start and end dates, and whether the agreement can be renewed.
- A dispute-resolution clause requiring informal discussion or mediation before anyone files a lawsuit. Mediation is cheaper and less destructive than court.
Loan Agreements
Lending to a friend is the single most common friend-contract situation, and the one most likely to go wrong. A loan agreement should lock down four things: the principal, the interest rate, the repayment schedule, and the consequences of default.
The simplest repayment structure is a fixed monthly amount until the balance hits zero. Interest-only payments with a lump-sum payoff at the end are possible, but that puts more risk on the lender because you’re counting on one large payment rather than steady progress. Whichever you pick, write specific dates and dollar amounts into the contract.
Late-payment terms matter more than people expect. Without them, a friend who falls behind has no contractual reason to catch up. A reasonable late fee, or a clause making the full balance due after a set number of missed payments, gives the agreement teeth.
Service Agreements
When a friend is doing paid work for you — web design, home renovation, pet sitting — the most important thing you can define is what “done” looks like. Vague descriptions like “redesign my website” invite disagreement. Instead, list specific deliverables, milestones, and a deadline. If payment is tied to milestones, spell out exactly what must be completed before each payment is released.
Tax Rules You Need to Know Before Lending
Private loans attract IRS attention, and the rules can produce tax bills neither friend expected. If you’re drafting a loan agreement, read this section before you set an interest rate.
Below-Market Interest and the AFR
If you lend at zero interest or below the IRS’s Applicable Federal Rate, the IRS treats the difference as if you had charged the minimum rate, given that interest income to your friend as a gift, and then received it back as interest. You can end up owing income tax on interest you never actually collected.4Office of the Law Revision Counsel. 26 USC 7872 Treatment of Loans With Below-Market Interest Rates
There’s an important exception. If the total outstanding loan balance between you stays at or below $10,000, the imputed interest rules don’t apply. For balances between $10,000 and $100,000, the imputed interest is capped at the borrower’s net investment income for the year, and if that income is $1,000 or less, it’s treated as zero.4Office of the Law Revision Counsel. 26 USC 7872 Treatment of Loans With Below-Market Interest Rates
The AFR changes monthly and depends on the loan term. As of January 2026, the rates for annual compounding are roughly 3.63% for short-term loans of three years or less, 3.81% for mid-term loans over three to nine years, and 4.63% for long-term loans over nine years.5Internal Revenue Service. Rev Rul 2026-2 Applicable Federal Rates You can charge more; charging less on a loan over $10,000 creates the imputed-interest problem. The simplest move is to check the current AFR when you draft the loan and set your rate at or above it.
If You Later Forgive the Loan
Cancelled debt is generally taxable income to the borrower.6Internal Revenue Service. Topic No 431 Canceled Debt – Is It Taxable or Not The IRS makes an exception when the cancellation is intended as a gift: the borrower doesn’t owe income tax on the forgiven amount, but the lender then deals with gift tax rules instead.
For 2026, you can give up to $19,000 per person per year without filing a gift tax return or touching your lifetime exemption.7Internal Revenue Service. Frequently Asked Questions on Gift Taxes Forgiving a $15,000 loan as a gift requires no filing. Forgive $25,000 and you’d file a return, though the lifetime exclusion typically means no actual tax is owed.
How to Lay Out the Document
You don’t need a lawyer to draft a friend contract, but you do need to organize it so someone reading it later — including a judge — can find the relevant terms quickly.
- Give it a descriptive title. “Personal Loan Agreement” or “Service Agreement,” not “Our Deal.”
- Open with the date and both parties’ full legal names and addresses. For example: “This agreement is entered into on [date] between [Name], residing at [address], and [Name], residing at [address].”
- Break the terms into numbered sections with clear headings: Loan Amount, Repayment Schedule, Late Payments, Dispute Resolution. Numbered sections make it easy to point at a specific provision later.
- Write in plain language. If both of you can’t read the contract and immediately understand every sentence, it’s too complicated. An unclear term is an argument waiting to happen.
- End with a signature block: space for each party to print their name, sign, and date.
Include an Integration Clause
An integration clause, sometimes called an “entire agreement” clause, is a short paragraph stating that the written contract is the complete and final agreement between you. Under the parol evidence rule, when a contract contains an integration clause, prior verbal or written promises that contradict the document generally cannot be used as evidence in a dispute.8Legal Information Institute. Integration Clause It prevents either friend from later claiming “but we also agreed to X over the phone.”
The language can be simple: “This document represents the entire agreement between the parties and supersedes all prior discussions, promises, or understandings, whether written or verbal.”
Changing the Agreement Later
Circumstances change. When they do, put every modification in writing. Draft a short amendment that references the original contract, describes the change, and is signed and dated by both parties. Verbal modifications are difficult to prove and may not be enforceable depending on the contract’s own terms. If your original contract requires modifications to be in writing, stick to that.
Signing
Before anyone signs, read the entire document out loud together. It feels awkward, and it’s the fastest way to catch ambiguities. If either of you hesitates at a sentence or says “I thought it meant…,” you’ve found a problem to fix now instead of later.
Both parties sign and date the contract. The date establishes when the agreement takes effect; if performance starts on a different date, say so explicitly rather than relying on the signing date. A disinterested third-party witness isn’t legally required for most contracts, but a witness adds proof that both parties signed voluntarily and were who they claimed to be. Each party should keep an original signed copy. If you only have one original, make copies and have both parties initial each as a true duplicate.
If the Agreement Is Broken
Nobody wants to think about this when drafting with a friend, but it’s the whole reason you’re writing in the first place. A written contract gives you legal options you otherwise wouldn’t have.
The default remedy for a broken contract is monetary damages: the court tries to put you in the same financial position you’d have been in if the contract had been honored. If you lent $5,000 and your friend repaid $2,000, you’re entitled to the remaining $3,000 plus any interest the contract specified.9Legal Information Institute. Breach of Contract If your contract includes a reasonable, non-punitive liquidated-damages clause — a pre-agreed penalty for breach — courts will generally enforce it, which spares you from having to prove actual damages. That alone is a good reason to include one.
You also have an obligation to minimize your own losses once a breach happens. If your friend stops paying and is willing to renegotiate, refusing to engage and then suing for the maximum amount can hurt you in court. Judges expect the injured party to take reasonable steps to limit the damage.10Legal Information Institute. Duty to Mitigate
For most friend contracts, the dollar amounts are small enough for small claims court. Limits vary by state, with most jurisdictions allowing claims somewhere between a few thousand dollars and $10,000 or more. The process is designed for people without lawyers: you file a complaint, pay a modest filing fee, notify the other party, and present your case. A signed contract makes your case dramatically stronger than trying to prove a verbal agreement. If you win, the court issues a judgment, but collecting on it is your responsibility, and that can be its own challenge if the other person doesn’t voluntarily pay.