Loan Agreements By Purpose
Loan agreements can be customized for various financial situations, whether for business, personal loans, or repayment plans. A well-crafted agreement offers clarity and legal protection. Use our document builder to create a tailored agreement with simple templates and guidance.
Outlines terms for lending money to a business, including repayment, interest, and collateral.
Business Loan
Legally documents a borrower's promise to repay a specific amount under agreed terms.
Promissory Note
Formally forgives a borrower’s obligation to repay a loan or outstanding balance.
Release of Debt
What Is a Loan Agreement?
A loan agreement is a legally binding contract between a lender and borrower that outlines key terms such as repayment, interest, and fees, thereby protecting both parties involved. It defines responsibilities, clarifies that the transaction is a loan rather than a gift, provides legal protection for recovering unpaid funds, and helps ensure tax compliance.
Common use cases for loan agreements include personal loans for vacations or weddings, financial emergencies, auto purchases, home renovations, educational expenses, and extracurricular activities. By clearly documenting the terms, these agreements reduce misunderstandings and aid in dispute resolution.
Loan Agreement vs. Promissory Note
Loan agreements and promissory notes both aim to clarify loan terms. This provides transparency and peace of mind. Both types of contracts may also outline interest rates and repayment timelines.
Compared to promissory notes, loan agreements offer greater legal protection. They are better for more complex loans and may include more detailed terms of conditions than promissory notes.
Promissory notes may be preferred if the lender and borrower already know one another. For example, family members or friends may use promissory notes to document when they lend money to people they know and trust.
| Loan Agreement | Promissory Note | |
|---|---|---|
| Purpose | Formalizes loan terms. | Shows that borrower will repay the loan. |
| Parties Involved | Lenders, borrowers, and guarantors. | Lenders and borrowers. |
| Loan Types | Secured and unsecured loans. | Mostly unsecured loans. |
| Use Cases | Auto loans or complex personal loans. | Personal loans. |
Use a loan agreement to formalize complex terms for secured or unsecured loans, especially if guarantors are required. Use a promissory note for unsecured loans involving friends or family members.
What Should a Loan Agreement Include
By clearly defining the below elements, both the lender and borrower can avoid misunderstandings and have a reference point in case of disputes.
- Loan Amount and terms: Specify the principal amount being lent and the conditions under which it will be repaid.
- Interest rate: Clearly state the interest rate, whether fixed or variable, and how it will be applied to the outstanding balance.
- Repayment schedule: Detail the payment schedule, including the frequency of loan payments (e.g., monthly payments) and the due date for each installment.
- Collateral: If the loan is secured, describe the collateral provided by the borrower.
- Late Payment provisions: Outline any late fees or penalties if the borrower fails to make regular payments on time.
- Default terms: Define what constitutes a default and the remedies available to the lender if the borrower defaults, including the handling of accrued interest and actions like borrower waives presentment.
If the loan involves collateral like a car or personal property, consider using a bill of sale to document the transfer of ownership.
How to Write a Loan Agreement
Despite their formal structure, loan agreements can be straightforward and easy to draft.
1. Choose the Loan Type
The first step to drafting a loan agreement involves determining which type of loan is appropriate for the situation at hand. Different types of loans are relevant in different situations. When selecting a loan type, consider why the agreement is needed and how much risk this loan involves. Common categories include:
- Secured loans: Require collateral, such as a vehicle or house, to guarantee repayment.
- Unsecured loans: Do not require collateral, making them riskier for lenders and potentially subject to higher interest rates.
2. Gather Key Details
Several details shape a loan agreement. This document is typically divided into a few main sections that offer insight into who plans to lend or borrow money and how this will be paid back. Before drafting the agreement, clarify these essentials:
- Names: Include the borrower’s and lender’s full names and addresses
- Loan amount: State the principal sum being borrowed before detailing interest calculations
- Interest rate: Specify the rate as an annual percentage and clarify how it accrues
3. Define the Terms and Conditions
The loan agreement terms and conditions set clear expectations for borrowers and lenders. These details outline the most important aspects of the loan.
- Repayment structure: Detail due dates, payment frequency, and installment amounts
- Late payment fees: Explain when fees apply and how much will be charged
- Prepayment terms: Indicate whether early payments are allowed and if penalties apply
- Default terms: Clarify what happens if the borrower fails to repay, including potential legal action
4. Add Collateral (If Applicable)
If the agreement involves a secured loan, it should confirm what will be used as collateral and how the lender can claim this collateral if needed.
Provide specific details when available. For a vehicle, this could include the make or model. If property is used as collateral, the agreement should include a description, complete with the address and any identifying features.
This section of the agreement should also include the estimated value of the collateral. This may be determined based on market value or by conducting an appraisal.
5. Include Guarantor Details (If Required)
Some loans involve guarantors. These individuals agree to cover the debt if the borrower fails to repay the loan. If guarantors are used, they should be identified within the agreement, which should also reveal how guarantors will handle repayment obligations.
- When to use a guarantor: Often needed for unsecured loans or borrowers with low credit scores.
- What makes a good guarantor: Should have a strong credit score and a stable income.
Notary or Witness?
Not required, but having a witness or notary can add legal protection and help confirm signatures were made voluntarily.
Loan Agreement Sample
Below, you can view a loan agreement sample. You can customize this template to meet your requirements using our document editor; then you can download it in PDF or Word format.
Charging Interest on a Loan
Charging interest isn’t required, but it can help lenders manage risk and earn a return. Rates can be fixed or variable, and simple or compound. Personal loan rates typically range from 8% to 20%, but can be higher for borrowers with poor credit. Be clear about how interest is calculated and applied.
Collateral (like a car or house) may be required for larger or riskier loans. It helps protect the lender if the borrower can’t repay. Unsecured loans may have higher interest rates or tougher credit requirements.
Many states cap interest rates under usury laws. Check local regulations to stay compliant.
Secure Your Loan with a Custom Legal Contract
Ready to draft your loan agreement? Legal Templates makes the process simple and stress-free. Our easy-to-use editor helps you customize a legally sound document that fits your specific needs. Get started today and personalize your agreement in just a few clicks.
Frequently Asked Questions
How do I draw up a loan agreement?
To draw up a loan agreement, identify the loan type (secured or unsecured), gather key details (such as names, loan amount, interest rate, and repayment terms), define the terms and conditions, and include collateral or a guarantor if required. Legal Templates provides a step-by-step editor to help you create a customized agreement.
Can you cancel a loan agreement after signing?
Once signed, a loan agreement is legally binding. However, cancellation may be possible if both parties agree in writing or if there’s a cancellation clause included in the contract. Certain state laws may also allow cancellation within a specific time frame. It’s best to review the agreement and consult a legal expert if unsure.
How do I write a loan agreement between family members?
When writing a loan agreement between family members, include the same details as any formal agreement: names, loan amount, interest rate, repayment schedule, and any penalties or conditions. This helps avoid misunderstandings and keeps the arrangement clear and legally enforceable.
Are loan agreements legally binding?
Yes, loan agreements are legally binding as long as they include clear terms, are agreed upon voluntarily by both parties, and involve the exchange of something of value. Signatures from both the lender and borrower are essential. While not required, having a witness or notary can add an extra layer of legal security.
