A payment agreement is a contract between two individuals that stipulates the terms and conditions of a loan. It's used by people who borrow or lend money or those who wish to create terms for a debt already incurred, according to Rocket Lawyer Inc.
- Determine the amount to be paid
The payment letter should state the amount of the debt, the debtor's and creditor's names and the terms of the repayment. If interest is to be added to the debt, it should be determined whether it will be simple interest (equal to a flat percentage of the principal) or compound interest (a percentage of the principal plus interest).
- Decide on an amortization period
The debtor and creditor should agree on how much time will be allowed for repayment of the debt and calculate the interest. The payments can be spread equally over a number of months, using an amortization table.
- Compose the letter and sign
A payment agreement states the debtor's willingness to pay the debt, the agreed-upon terms, the total amount to be paid, the payment period in months or years and other mitigating factors, such as the penalties for late payment or default. If the amount of debt is significant, it should be notarized. Both parties must sign the agreement.