Function

• While a promissory note for a small loan to a relative or a friend may seem like an overstated effort, the borrower's signature on the promissory notes is your peace of mind that the borrower understands your expectations surrounding the loan. Liz Pulliam Weston of MSN Money advises to be clear that you expect to be paid back particularly if previous loans, inadvertently or otherwise, turned into gifts.
  
  

Types

• Personal loans between family members and friends are typically small and a simple note may be all you need. The simple note states the amount of the loan and date you expect to be paid back. If you want to request repayment at any time, you would use a demand promissory note. Of course, your family member or friends may not be comfortable with demand promissory notes because they may not be prepared to repay on your demand. For larger loans, you may choose to have your relative or friend repay small manageable installments at certain intervals---in which case you would use an installment promissory note.
  
  

Considerations

• CNN Money Magazine cautions that you should only lend money if you are prepared to lose the money. When lending money to family and friends, consider the history of the borrower. If your family member or friend has a history of borrowing but not repaying, expect the same results again. If you are lending more than $10,000, consider charging interest and be sure to check with your accountant for tax implications.
  
  

Misconceptions

• CNN Money acknowledges that the risks of borrowing money from family and friends outweigh any rewards. While you may believe helping out a relative or a friend can bring you closer, evidence shows that loans between relatives and friends invite stress into the relationship. For example, there may be some misgivings if the borrower purchases something the lender deems unnecessary while the loan remains unpaid. Also, be careful not to confuse a promissory note with an "IOU." According to Investopedia, an IOU acknowledges the amount of a debt while a promissory note states the amount owed; the steps to pay back; and the consequences of default.
  
  

Benefits

• Friends and families are supportive of each other in many ways including financially. A promissory note ensures that the parties involved understand that the money given is a loan that must be repaid. A thorough promissory note that details every minute aspect of a personal loan saves relationships because the parties involved possess written and signed documentation of the repayment expectations of the loan. Unnecessary misunderstandings that can threaten a relationship are therefore avoided.