A payment agreement is a document that outlines the manner in which a debtor will pay back the creditor. A creditor can set up a payment plan agreement to make the debtor’s repayments more manageable, which can improve their chances of receiving the full debt amount back.
What Is a Payment Agreement?
A payment agreement is a legal contract planning a way for someone to compensate another party for a purchased item/service or an existing debt. The plan describes the terms to which both parties agree. It’s useful for borrowers who don’t want to or can’t pay the full amount for goods or services in a single installment.
Some common uses for payment plans include:
- Buying a car
- Paying overdue rent
- Paying off existing debt
- Paying for tuition or legal/dental/medical services
Reasons to Make a Payment Agreement
Some benefits of making a payment plan agreement include the following:
- It provides explicit instructions on how and when the borrower should make payments.
- It offers a level of protection for both the lender and the borrower. The borrower won’t have to make larger payments than the agreement states, and the lender can expect a minimum payment amount at regular intervals.
- If you draft it well, you can use a payment plan agreement as evidence in court. This evidence can be helpful if the borrower doesn’t follow the terms of the agreement and the lender needs to take the situation to court to get their money back.
What to Include in Your Payment Agreement
While some creditors will structure payment plan agreements differently, you can ensure to include the following elements:
Identify the names and addresses of the creditor and debtor. Including this information can ensure both parties are easily identifiable.
The headline of a payment plan agreement is to pay off the total amount to the lender. In the agreement, you need to outline what the loan is for and how much the total debt is.
Start and End Dates
Another important element to include when writing a payment plan agreement is when the total debt needs to be paid. Make sure you include the date the agreement is starting and when it will end.
When writing a payment agreement, you need to consider the payment method and the payment frequency. Will the borrower pay the full amount as a lump sum, or will they pay in installments? If you agree to go with regular payments, you will need to decide how often the payments will be made and when. You will also need to agree on what payment method will be used.
If you’re creating your own payment plan agreement, you should also consider additional terms such as future amendments, legal fees, indemnification, and an acceleration clause if the borrower cannot render payment.
Your payment plan agreement won’t be legally binding without written consent from both the borrower and the lender. Signing the contract acts as legal proof that the involved parties have accepted the terms of the agreement.
How to Set Up a Payment Plan
Here’s a list of steps on how to set up a payment plan:
Step 1 – Explain the Options
Meet with the borrower to determine payment plan options. Some borrowers may want to pay off the debt as quickly as possible in fewer payments, while others may want to extend the payment period.
Step 2 – Complete the Agreement
Review all sections and clauses with the borrower. Ensure they understand and agree to the outlined terms. Finalize the agreement by signing it as the creditor and obtaining the borrower’s signature.
Step 3 – Start Receiving Payments
Once the payment plan agreement is initiated, you can start receiving payments via the designated payment method. Once the borrower meets all their payments on time and reaches the end of the established payment period successfully, you can release them as a debtor.
If the borrower falls behind on their expected payments, you can follow the payment plan agreement’s guidelines for defaulted payments.
Payment Agreement Sample
Review our payment agreement template below. Download it as a PDF or Word file to start creating your own: