The requirement to have legal proof of a loan:[1]

It is forbidden for a lender to give a loan without having a form of legal testimony of its occurrence.[2] This applies even if the borrower is a Torah scholar ]and is thus a trustworthy person].[3] [Despite the above, the widespread custom is to be lenient in this matter and not require any form of legal authentication when giving a loan.[4] Some Poskim[5] have learned merit on this custom. Nevertheless, each person is to certainly be stringent upon himself in this matter.[6]]

The following methods of legal testimony may be used:[7]

• Eidim: Have witnesses witness the transaction.
• Mashkon: Have collateral given to the lender by the borrower.[8]
• Shtar: Have a loan document [signed by witnesses]. [According to some Poskim[9], a loan document signed by the borrower, such as an IOU note, also suffices. Other Poskim[10], however, argue.]

The best method: Although any of the above three methods may be used, the most praised method is through writing a document.[11]

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[1] Admur Halva 6; Michaber 70:1; Rambam Halvah 2:6; Bava Metzia 75b

[2] The reason: As the borrower may come to deny the loan and hence come to transgress his obligation to pay. This is avoided if one is particular to receive a form of documentation or testimony regarding the loan. Now, since the lender has ability to do so, if he does not do so he transgresses the command “Do not place a stumbling block in front of your fellow”, as due to lack of proof, the borrower has ability to wrongfully deny the occurrence of the loan. [Admur ibid; Michaber ibid; Rav in Bava Metzia ibid] Alternatively, the reason is because if he has no proof of the loan, people will think of him as an extortionist who is trying to swindle money out of a someone who never really borrowed from him. He is thus bringing a curse upon himself, as people will curse him as a result. [2^nd reason in Michaber ibid; Smeh 70:1; Shach 70:3; Reason of Reish Lakish in Bava Metzia ibid based on the verse in Psalms 66:31 “Tialmana Sifsei Sheker Hadovros Al Tzadik Asak”; Omitted from Admur ibid; See Taz 70:1 for practical ramifications of the two reasons, and that the lender can choose to forgive the second reason of being cursed]

The severity: The Gemara ibid states that one who gives a loan without having proof of the transaction, is considered one of three people whose prayers are not answered. [Bava Metzia ibid; However, see Rashi ibid who explains this to be in reference to the Beis Din, that they will not heed his claim, and not in reference to G-d hearing one’s prayers.

[3] The reason: As we suspect the borrower may come to forget about the loan due to his preoccupation in Torah study and come to deny it. [Admur ibid; Shach 70:1; Smeh 70:2; See story in Gemara ibid with Rvaina and Rva Ashi] He will thus transgress the prohibition of Lifnei Iver. [Implication of Admur ibid; Lechem Mishneh on Rambam ibid] However, some Poskim learn that in such a case he does not transgress Lifnei Iver and it is rather forbidden due to bringing a curse onto himself. [See Smeh ibid] Admur ibid omits this second reason.

[4] Aruch Hashulchan 70:1; Tzitzis Eliezer 7:47 in name of Divrei Malkiel “No one is careful in this today”

[5] Aruch Hashulchan 70:1; Tzitzis Eliezer 7:47 in name of Divrei Malkiel

The reason: As people know each other and trust each other. [Aruch Hashulchan ibid]; As the above requirement is only a Midas Chassidus. [Ritva Megillah 28a in name of his teacher, brought in Divrei Malkiel ibid]

[6] Shevet Halevi 10:268

[7] Admur ibid; Michaber ibid

[8] The worth of the collateral: Seemingly, the Mashkon must be of equal worth to the loan, or more, however, from the Poskim ibid it is implied that the Mashkon of any worth is valid, whether more or less than the loan. [See Admur ibid, Smeh 70:4 and Shach 70:2 that by a Mahskon the borrower can still argue on the amount he borrowed, thus implying that there is no requirement for the Mashkon to be of equal worth. See also Smeh 70:3 that the Mahskon only “Partially” solves the issue, as he can take “up until the worth of the Mashkon” in exchange for the loan.] However, perhaps one can learn the intent iof the Poskim ibid that the Mashkon must be of at least equal worth, although since the borrower can still argue on the amount, and the lender will thus be forced to take a swear, therefore it is not the best method. Vetzaruch Iyun

[9] Shach 70:2 in implication of Smeh 70:4; Poskim who rule that we do not accept “Taanos Paratai” even by a signed IOU [see Ritva Bava Metzia 75b; Bava Brasa 175b; Shach C.M. 69:14; Rishonim in Tur/Beis Yosef 50 and 69]; Regarding the power of an IOU document-see Michaber C.M. Chapter 69 and the following article edited by Rav Z.N. Goldberg https://www.yeshiva.org.il/wiki/index.php?title=%D7%9E%D7%99%D7%A7%D7%A8%D7%95%D7%A4%D7%93%D7%99%D7%94_%D7%AA%D7%9C%D7%9E%D7%95%D7%93%D7%99%D7%AA:%D7%9B%D7%AA%D7%91_%D7%99%D7%93%D7%95

[10] Shach 70:2 in name of Maharashdam 23; Poskim who rule that we do accept “Taanos Paratai” by a signed IOU [See Michaber 69:50:1; 69:2; Rishonim in Tur/Beis Yosef 50 and 69]

[11] Admur ibid; Michaber ibid; See story in Gemara ibid with Rvaina and Rva Ashi

The reason: As by a document, the exact amount of the loan is recorded, unlike by a collateral. [Admur ibid; Shach 70:2; Smeh 70:4] Likewise, one does not require searching for the witnesses to testify, as would be the case if one merely used witnesses without written testimony. [Admur ibid]