Sometimes family members or close friends will be in need of some assistance, and ask for a personal loan. It is important to understand that a loan to another person is a contract, and Texas law has rules governing contracts. Becoming a lender for someone is typically a bad idea when that is not your actual business.
When a typical loan is made, by a sophisticated lender like a bank, the parties write up a Promissory Note. This document contains all the material terms of a loan, including the principal, interest, date the loan comes due, and repayment terms. Parties who do not have a promissory note have an “oral contract” which is still a contract under Texas law, but it comes with serious problems.
First of all, the loan itself and its terms become a “he said, she said” situation, and you may be relying on 12 people you’ve never met to believe you. Furthermore, if you fail to prove parts of the contract, like the repayment terms, the Court may decide that you never had a contract in the first place.
Whether the parties intended to enter a binding contract or merely an unenforceable agreement to make a contract in the future is ordinarily a question of fact; this means it is something a jury would decide after hearing evidence.. See Scott v. Ingle Bros. Pac., Inc., 489 S.W.2d 554, 554‑56 (Tex. 1972); Houston Chronicle Pub. Co. v. McNair Trucklease, Inc., 519 S.W.2d 924, 928 (Tex.App.‑‑Houston [1st Dist.] 1975, writ ref’d n.r.e.). Whether a particular agreement constitutes a valid contract, is generally a question of law for a Judge to determine prior to allowing the Jury to consider evidence of the contract. Chapman v. Mitsui Eng’g. & Shipbldg. Co., 781 S.W.2d 312, 316 (Tex.App.‑‑Houston [1st Dist.] 1989, writ denied).
A contract is not legally binding unless it is definite enough in its terms so a court can understand what the promisor undertook. T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 221 (Tex. 1992). HN28 Where an essential term of an agreement is open for future negotiations, there is no binding contract. Id. Each contract should be considered separately to determine its essential terms. Id. In a contract to loan money, the material terms are generally the amount to be loaned, the maturity date of the loan, the interest rate, and the repayment terms. Id.
If you are considering making a personal loan to someone else, you should absolutely speak to an attorney first. An attorney can advise you on whether it’s a good idea, help you prepare any necessary documentation if you decide to go through with the transaction, and can prepare you for any future issue that may arise from the situation.