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.
Last Update January 18th, 2023
- What Is a Loan
- Types of Loan Agreement
- How to Write a Loan Agreement
- What to Include in a Loan Agreement
- Loan Agreement vs Promissory Note
- How to Pay A Loan Agreement
- How to Sign a Loan Agreement
- Loan Agreement Sample
- Loan Agreement FAQs
Download our professional examples
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:
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 agreement 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.
IOU: An IOU is an agreement made between a borrower and lender, it is known as a friendly loan agreement because it is informal, however, it can be used in court.
How to Write a Loan Agreement
There are a few important points to remember when you write a Loan Agreement.
First, 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.
To correctly include these elements in your Loan Agreement, you must include the following:
Date of commencement: Include when the Loan Agreement will begin
Parties: Enter the full names and complete addresses of both the Borrower and the Lender.
Loan Amount: Include the amount of money the lender will loan to the Borrower.
Terms and Conditions: Add how the loan will be paid back (single payment, installments), interest, collateral, late fees, prepayment, governing law, etc.
Signatures: Sign the Loan Agreement with the other party, along with your names and date.
Use our Loan Agreement template to follow these steps and correctly create your document.
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.
Loan Agreement vs Promissory Note
A Loan Agreement and Promissory Note are often compared or even mentioned interchangeably.
While they are similar in certain aspects, the legal documents have some key differences.
Check the table below to understand the similarities and differences between the two documents.
|Loan Agreement||Promissory Note|
|There is a promise to repay||There is a promise to repay|
|Includes steps for repayment||Includes steps for repayment|
|There is a repayment timeline||There is a repayment timeline|
|Is legally binding||It is legally binding|
|Includes the signature of the borrower||Includes the signature of the borrower|
|Includes the lender’s signature||Does not include the lender’s signature|
|Can repay in installments||Cannot repay in installments|
|Includes consequences of not paying||Does not include consequences|
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.
How to Sign a Loan Agreement
To sign your Loan Agreement, you should check with your jurisdiction to determine if there are any special requirements to fulfill before adding your signature.
In most cases, you are not legally obligated for the signing of the agreement to be witnessed, however, you may wish to sign the document in front of a:
Normally, a witness is considered to be any neutral third-party.
A notary can help to prevent any attempt at fraud committed by the other party in the agreement by verifying the signatures on the document.
While it may not be necessary, it is always a good idea to sign the document in front of a notary or a witness.
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.
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.
When you make an agreement with another person, aLoan Agreement provides assurances that the borrower will honor the deal.
If you are lending someone money, you should always create and sign a Loan Agreement before giving your money to the other person.
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.