Outline the repayment schedule and terms between a lender and a borrower with a loan agreement. Start your own customized financial contract now with our step-by-step template questionnaire.
What Is a Loan
A loan is an agreement between two parties, whereby one individual or business (known as the lender) gives an amount of money to the other party (in this case known as the borrower). This sum is then paid back over a period of weeks, months, or years.
The loan amount is usually returned to the lender in regular installments and very often a percentage of interest is added to the original amount. A loan agreement is used by these parties to create a clear record of the sum of money that is being lent, the terms of repayment, and any interest that is being levied on the amount.
A loan agreement can be known by the following alternate names:
Personal Loan Agreement
When to Use a Loan Agreement
A loan agreement can be practical for borrowers in a few scenarios. It is possible to use this kind of financial contract to lend people money for real estate, businesses, student loans, or personal purchases.
It is also useful if you are a lender who is looking for assurances that the borrower will honor the deal. A written loan agreement allows people to set reasonable expectations of when the money should be paid back, what the frequency of repayments should be, what can be if a late payment or default occurs etc.
A loan agreement is legally binding and enforceable if either party attempts to break it unilaterally without good reason. However, most of the time it provides the clarity and confidence that is needed before undergoing a major transaction such as this.
Types of Loan Agreement
There are many different types of loan agreements that can be used depending on your specific necessities. This sort of financial contract might be used for one of the following types of loan:
Home equity loans: A loan that is secured against real estate property owned by the borrower; such as a house.
Business loans: These kinds of arrangements are used to help people secure funds to set up a new business venture or to invest in a pre-existing enterprise.
Personal loan: A personal loan template allows a borrower and a lender who are family members or friends to outline the details of money being lent.
Family loan agreement: A personal loan given by a member of your immediate family.
Car loans: These are paid when the borrower wishes to purchase a new car or vehicle.
Student loans: A student loan is used to allow a college or university learner to pay their tuition and living costs.
Federal Housing Administration (FHA) loans: This kind of loan is available to a borrower who wishes to buy a house but has a credit rating below 580.
How to Write a Loan Agreement
There are a few important points to remember when you write a loan agreement. First of all, you must use clear and easy-to-understand language so that it is immediately obvious who is who in the agreement and how the money should be repaid.
After all, a loan agreement is a legally enforceable contract so it must be obvious to anyone reading it what the terms are and who the parties bound by it are. There should be no ambiguity at any stage or it could lack the clout necessary to hold a breaching party to account.
What to Include in a Loan Agreement
There are some details that must appear in your loan agreement no matter what. Failure to include crucial information could lead to your final form proving ineffective when it is needed most.
The key contractual terms to remember in your loan agreement include the following:
How much is being borrowed (sometimes referred to as the principal sum)
When it should be paid back
The amount of interest that is to be charged
If any late fees or pre-payment penalties apply
What should happen if the borrower defaults on the amount
When you complete a loan agreement with our expert, step-by-step instructions, and questionnaire, you will be prompted to provide these details. This will help you make sure that your final document is able to perform as needed.
How to Pay A Loan Agreement
Once a loan agreement has been finalized and the borrower has received the funds requested, they must follow the repayment schedule specified by the contract. This will often require the buyer to pay regular installments on a week-by-week or month-by-month basis.
However, this is not the only possibility open to lenders and borrowers. If the amount is smaller, the loan agreement might stipulate that the principal has to be paid in a single lump sum on a certain date or when the issuer requests the money back.
Additionally, some agreements will insist that some of the capital has to be returned via installments with a larger final payment made at the end of the contract. This normally involves the interest being paid off via the installments and the principal amount being paid back in full at the end.
Simple Loan Agreement Sample
Before you start writing and modifying your own loan agreement template, it can be helpful to look over a real-life example. If you’re not sure about the terminology or structure that a completed document should include, simply scroll through our loan agreement sample below to get more familiar with how to get it right.
Loan Agreement FAQs
There’s a lot more to know about loan agreements as a legal document. Find out what other key details you might need to consider before entering into a lending contract now in our FAQs.
Who Needs a Loan Agreement?
A loan agreement should be used by anyone preparing to lend money for any reason. These financial contracts protect lenders from possible defaults by setting out repayment schedules, interest rates, and what will happen in the case that the borrower cannot pay back the loan. It is legally enforceable should disputes arise and also creates a clear record of what was agreed at the start of the loan.
Loan agreements also help borrowers too. They do this by fixing the repayment schedule and interest that must be paid back in writing. This allows the person who is paying back the loan to be fully aware of what they will have to pay back and when. It also prevents the borrower from being potentially exploited by predatory interest rates and sudden unwanted changes in the repayment terms.
Why is a Loan Agreement Important?
Loan agreements help provide clarity and security when money is being lent. This helps avoid potential disputes and defaults when the money is being repaid.
If a borrower decides not to pay or the lender changes the repayment terms suddenly and there is no loan agreement, there is little either party can do to enforce the original accord. This could leave one side significantly out of pocket.
What is a Loan Shark?
A Loan Shark is an individual who lends money at very high-interest rates. Each state has its own laws on the maximum amount of interest that can be levied on a loan agreement and Loan Sharks will often charge borrowers a rate above the permissible amount.
However, it is important to remember that not all Loan Sharks operate outside the law. Some still adhere to their state’s Usury Rates but instead charge the highest level of interest possible and above what most financial institutions would normally require.
Should I Charge Interest in the Loan Agreement?
If you are lending or borrowing a large amount of money, the value of that principal sum will be affected by shifting inflation. Therefore lenders may wish to charge interest under the terms of a loan agreement to mitigate that factor and to compensate themselves for the risk they are undertaking.
It is, of course, not certain whether the borrower will be able to pay back all the money they owe successfully. To avoid uncertainty about future payments it is better to add interest to cover yourself from the possibility of any potential defaults today.