How to Loan Money Online: Note, Rate, and Repayment

To loan money online as a private lender, you verify the borrower, put the terms in a signed digital promissory note that charges at least the IRS’s Applicable Federal Rate, move the funds through your bank with a documented trail, and track every payment for tax reporting and possible enforcement. The legal principles are identical to any private loan; the difference is that identity, signatures, and payments all live in an electronic record you need to be able to produce years later.

Verify the Borrower Before You Draft Anything

Start by collecting the borrower’s full legal name, date of birth, and Social Security number. Those details let you pull a credit report through Equifax, Experian, or TransUnion. FICO and VantageScore both run from 300 to 850, with higher numbers indicating lower default risk.¹

You’ll also need the borrower’s bank details to send funds: the nine-digit routing number that identifies their bank, and their individual account number.² Ask for recent pay stubs or tax returns and compare existing obligations against income. A borrower already stretched thin will default whatever the score says.

Handle this material carefully. Social Security numbers and bank account details are exactly what creates liability if they leak. Encrypt the files, restrict access, and delete what you no longer need.

Pick an Interest Rate That’s Legal and IRS-Safe

Private lenders get squeezed from two directions. State usury laws cap how high you can go; federal tax rules punish you for going too low.

Every state sets a maximum allowable rate for private loans, and the caps vary widely. Depending on the state and the type of loan, the ceiling might sit as low as 5% or as high as 25%. Exceed the limit and you can void the interest portion of the loan entirely or trigger statutory penalties. Check the specific law in the borrower’s state before you commit to a number.

On the low end, the IRS requires private loans to charge at least the Applicable Federal Rate, which it publishes monthly. Charge less and the IRS treats the shortfall as “forgone interest” and imputes phantom income to you. In plain terms, you owe tax on interest you never actually received. For March 2026, the AFR rates compounded annually are 3.59% for short-term loans of three years or less, 3.93% for mid-term loans over three years but not more than nine, and 4.72% for long-term loans over nine years.³ The AFR changes each month, so pull the current revenue ruling before you finalize terms.

There’s a narrow exception. Gift loans of $10,000 or less between individuals are exempt from the imputed-interest rules, as long as the borrower doesn’t use the money to buy income-producing assets like stocks or rental property. For gift loans between $10,000 and $100,000, the imputed interest is capped at the borrower’s net investment income for the year.⁴ Above $100,000, the full imputed-interest rules apply with no cap.

Draft a Promissory Note That Will Hold Up

The promissory note is the backbone of the loan. Without one, you have a handshake that the IRS may recharacterize as a gift and that a court may struggle to enforce. It doesn’t need to be complicated. It does need to be specific. Many online platforms offer fill-in templates.

A workable note covers:

The exact principal amount the borrower is receiving.
The annual interest rate, and whether interest is simple (on principal only) or compound (on principal plus accumulated interest). Over a multi-year loan, that choice matters a great deal.
The repayment schedule, with each installment’s amount and due date. An amortization table removes ambiguity about how much of each payment covers interest versus principal.
The maturity date when the final payment is due.
Late fees, either flat or a percentage of the missed payment. Courts evaluate late fees for reasonableness. A fee that reads as punishment rather than compensation for the delay risks being struck down as an unenforceable penalty, so keep it tied to what the missed payment actually costs you.⁵
A grace period of roughly five to fifteen days before the late fee kicks in, to account for normal banking delays.
A precise description of any collateral. Use the VIN for a vehicle; use serial numbers for electronics or equipment. Vague descriptions weaken your ability to enforce a security interest.
Default provisions that spell out what happens on a missed payment, including whether you can accelerate the full balance.

Good documentation also protects your tax position. If a private loan lacks a written agreement, a fixed repayment schedule, or an interest rate at or above the AFR, the IRS can treat the whole transfer as a taxable gift rather than a loan. That shift creates gift tax exposure for you and wipes out any bad-debt deduction if the borrower never pays.

Sign It Electronically

Federal law puts electronic signatures on equal footing with ink. Under the E-SIGN Act, a contract cannot be denied enforceability solely because it was signed electronically.⁶ Platforms like DocuSign and HelloSign comply by recording each signer’s email address, IP address, and timestamp, creating an audit trail that proves who signed and when.

The workflow is straightforward. Upload the completed note, mark the signature fields, and the platform emails a unique signing link to the borrower. Once both sides sign, the document locks and each party receives a final copy. Store yours securely; you may need it years later for taxes or litigation.

One requirement catches people off guard. If the agreement replaces any disclosure the borrower would otherwise receive in writing, the borrower must affirmatively consent to receiving that information electronically before you send it.⁶ A checkbox confirming consent to electronic records does the job.

Move the Money

Once the signed note is in hand, initiate the transfer through your bank’s online portal. Two options dominate.

ACH transfers are the cheaper route. Standard ACH credits settle by the next business day after the receiving bank processes the payment.⁷ Same-day ACH is available if you submit before the final cutoff of 4:45 PM Eastern.⁸ Most banks charge little or nothing for outgoing ACH.

Wire transfers arrive faster, effectively immediate for domestic transactions, but they typically run $15 to $30 for an outgoing domestic wire and have earlier same-day cutoffs, often in the early-to-mid afternoon. Confirm your bank’s specific deadline.

Whichever route you take, save the confirmation showing date, amount, recipient account, and reference number. Ask the borrower to confirm receipt in writing. A short text or email is enough, and it closes the loop if there’s ever a dispute about whether the loan was funded.

Track Payments and Report the Interest

Log each payment as it arrives. For every installment, record the date, the total amount, and the split between principal and interest. Send the borrower a receipt after each payment clears.

Interest you earn on a private loan is taxable income. You report it on Schedule B of your federal return, listing the borrower’s name, address, and the total interest received during the year.⁹ The obligation exists whether or not you receive any tax form from the borrower. For individual-to-individual loans, the borrower generally isn’t required to send you a 1099-INT, so there’s nothing to wait for. You simply report what you collected.¹⁰

If you charged interest below the AFR, the IRS imputes the difference as income to you even though you never received it.⁴ On a $50,000 loan where you charged 1% and the AFR was 4%, you’d owe tax on the 3% gap. Charging at least the AFR from the start avoids the problem.

If the borrower defaults completely and you can show the debt is genuinely worthless, you may be able to deduct the loss. For personal loans unconnected to a trade or business, the IRS treats it as a short-term capital loss regardless of how long the loan was outstanding.¹¹ Short-term capital losses offset capital gains first, and you can deduct up to $3,000 of excess against ordinary income per year, carrying the rest forward. To claim it, you need to show reasonable efforts to collect and that the debt is truly uncollectible. This is where the signed note, payment records, and demand letters become critical.

When the loan is paid off, send written confirmation that the debt is satisfied in full, and if it was secured, release the lien or return the title. Failing to release a lien after payoff creates problems for the borrower and legal exposure for you.

If the Borrower Stops Paying

Most private lending disputes don’t reach a courtroom. They end with a borrower who slowly stops responding. Plan for that.

Start with a formal written demand. Send a letter (email is fine if your agreement allows electronic communication) stating the amount overdue, the dates each payment was missed, and a deadline to bring the account current, typically 15 to 30 days. Be specific about what happens next: acceleration of the full balance, pursuit of collateral, or a lawsuit. The letter isn’t just a courtesy; it creates the paper trail courts expect before escalation.

If the borrower still doesn’t respond, your next step depends on the amount. Small claims court handles disputes up to a state-set maximum ranging from $2,500 to $25,000. The process is built for non-lawyers, with low filing fees and informal hearings. Larger amounts go to regular civil court, where costs and complexity increase substantially.

For a secured loan, your note should already spell out your right to seize the collateral after default. Exact procedures vary by state and asset type, and you generally need to provide notice and follow specific steps. Skipping any of them can invalidate your claim.

One point in your favor: as the original creditor collecting your own debt in your own name, the Fair Debt Collection Practices Act does not apply to you.¹² If you hire a third-party collector, that collector must comply with FDCPA restrictions on contact methods, timing, and harassment.

When Federal Disclosure Rules Would Apply

A one-time loan to a friend or family member generally doesn’t drag you into federal consumer lending regulations. The Truth in Lending Act’s disclosure rules kick in only when you qualify as a “creditor” under Regulation Z, which requires extending consumer credit more than 25 times in the preceding calendar year, or more than 5 times if the loans are secured by a dwelling.¹³

Cross either threshold and you’d owe formal disclosures: annual percentage rate, total finance charges, payment schedule, and other terms in a standardized format. Penalties for failing to disclose are serious. Most individual lenders never hit those numbers, but if you’re thinking about making private lending a regular activity, count carefully. The threshold looks at the prior calendar year, so last year’s loans can make you a “creditor” for this one.

1
myFICO. What Is a Credit Score
2
ABA: The American Bankers Association. ABA Routing Number
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Internal Revenue Service. Rev. Rul. 2026-6 Applicable Federal Rates
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Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
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Legal Information Institute. UCC 2-718 – Liquidation or Limitation of Damages
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Office of the Law Revision Counsel. 15 USC 7001 – General Rule of Validity
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eCFR. 12 CFR 229.10 – Next-Day Availability
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Federal Reserve Financial Services. Same Day ACH Frequently Asked Questions
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Internal Revenue Service. Instructions for Schedule B (Form 1040)
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Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
11
Office of the Law Revision Counsel. 26 USC 166 – Bad Debts
12
Federal Trade Commission. Fair Debt Collection Practices Act Text
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eCFR. 12 CFR 1026.2 – Definitions and Rules of Construction