A Loan Agreement is a legal contract between a lender and borrower outlining the terms of a loan. Using a loan agreement template, the lender and borrower can agree on the loan amount, interest, and repayment schedule.
A lender can use a Loan Agreement in court to enforce repayment if the borrower does not uphold their end of the agreement.
1. What Is a Loan Agreement?
A loan agreement is a written contract between two parties — a lender and a borrower — that can be enforced in court if one party does not hold up his or her end of the bargain.
The borrower agrees that the money being borrowed will be repaid to the lender at a future date and possibly with interest. In exchange, the lender cannot change his or her mind and decide to not lend the borrower the money, especially if the borrower relies on the lender’s promise and makes a purchase with the expectation that he or she will receive money soon.
A simple loan agreement in writing will identify the following basic elements:
- Borrower: (aka. the “buyer” or “payer”) who is receiving the money and will repay it back
- Lender: (aka. the “issuer”, “maker”, “payee”, or “seller”) who is giving the money and will get the money back
- Principal Amount: the sum of money being borrowed
- Interest: additional money owed, usually a percentage, based on the amount borrowed
- Maturity Date: when the money should be repaid to avoid being in default
Further, the parties should consider these two additional questions:
1. How will the money be repaid?
The loan agreement should clearly detail how the money will be paid back and what happens if the borrower is unable to repay.
There are generally four types of repayment options:
| Installment Payments | Installments with Final Balloon Payment | Due on Specific Date ("Lump Sum") | Due on Demand (“Payable on Demand”) |
|---|---|---|---|
| Specific due date | Specific due date | Specific due date | No specific due date |
| Payments for principal and interest are made at regular intervals | Payments for interest only are made at regular intervals, principal amount due on maturity date | Entire amount owed, including interest, is paid all at once | Entire amount owed is due whenever the lender wants his or her money back |
| Example: $1,500 monthly payment actually consists of $500 towards the outstanding principal and $1,000 towards the interest with $1,500 due on the maturity date | Example: $500 monthly payment is applied only towards interest and full $10,000 loan amount is due on the maturity date | Example: $10,000 loan for a friend’s small business is due on a specific date | Example: $10,000 loan for a friend's small business is due at any time or whenever financially feasible |
2. What other details should be included?
The contract may also include these additional provisions:
-
Acceleration: whether the lender can move up the date of repayment, and make the borrower repay the loan immediately
-
Possible Events of Acceleration
- if the borrower becomes bankrupt
- if the borrower fails to make payments
- if the borrower passes away (i.e. death) or dissolves
- if the borrower wants to pay off the note early
- if the borrower sells off a large or material portion of their assets
-
Possible Events of Acceleration
- Amendment: any changes to the agreement must be in writing
- Collateral: what real estate or property can the lender keep if the borrower defaults
- Governing Law: which state laws apply if there is a problem with the agreement
- Joint and Several Liability: all of the borrowers are individually responsible for the full amount of the loan
- Late Charges: the borrower pays a penalty if payment is late
- Prepayment: the borrower can pay off the loan and interest early, possibly for a discount
- Right to Transfer: the lender may be able to transfer the loan to another party
As a reference, people often refer to this document by other names:
- Business Loan Agreement
- Loan Contract
- Personal Loan
- Promise to Pay
- Secured/Unsecured Note
- Term Loan
Personal Loan Agreement Sample
The loan agreement sample below details an agreement between a borrower and a lender. The lender agrees to give the borrower a loan, who agrees to pay back the loan according to the conditions specified.
The Difference Between a Loan Agreement, Promissory Note, and IOU
In general, a loan agreement is more formal and less flexible than a promissory note or IOU. This agreement is typically used for more complex payment arrangements, and often gives the lender more protections such as borrower representations and warranties and borrower covenants. In addition, a lender can usually accelerate the loan if an event of default occurs, meaning if the borrower misses a payment or goes bankrupt, the lender can make the entire amount of the loan plus any interest due and payable immediately.
Here is a simple chart explaining the difference between an IOU, a promissory note, and a loan agreement.
| Loan | Promissory Note | IOU |
|---|---|---|
| promise to repay | promise to repay | promise to repay |
| steps for repayment | steps for repayment | |
| timeline to repay | timeline to repay | |
| legally binding | legally binding | |
| signature of borrower | signature of borrower | |
| signature of lender | ||
| repay in installments | ||
| consequences of defaulting (i.e. right to foreclosure) |
For more detailed information view our article on the differences between the three most common loan forms and choose which one is right for you.
2. Who Needs a Loan Agreement?
While loans can occur between family members – called a family loan agreement – this form can also be used between two organizations or entities conducting a business relationship.
Here is a table detailing common borrowers and lenders who might need this agreement:
| Possible Lender | Possible Borrower |
|---|---|
| Seller of a home | Buyer of a home |
| Seller of a car | Buyer of a car |
| Investor | Startup company |
| Family member | Family member |
| Sympathetic friend with extra funds (i.e. able to lend but not give money) | Reliable friend with unexpected debt (i.e. unforeseen medical bills) |
3. When To Use a Loan Agreement Form
Relying only on a verbal promise is often a recipe for one person getting the short end of the stick. If the payback terms are complicated, a written agreement allows both parties to clearly spell out any installment payment terms and the exact amount of interest owed. If one party does not fulfill his or her side of the bargain, having this agreement in writing has the added benefit of memorializing both parties’ understanding of the consequences involved.
If a disagreement arises later, a simple agreement serves as evidence to a neutral third party like a judge who can help enforce the contract.
Here are some situations where you may need a Loan Agreement:
- Starting a business and need a capital loan
- Purchasing land or a home with a real estate loan
- Investing in a higher education or repaying a student loan
- Buying a new car or boat for personal reasons
- An employee loans from their employer
- Helping a friend or family out with a personal loan
For personal loans, it can be even more important to use a loan contract. To the IRS, money exchanged between family members can look like either gifts or loans for tax purposes.
4. Consequences of Not Having a Loan Agreement
A simple loan agreement details how much was borrowed, as well as whether interest is due and what should happen if the money is not repaid.
Here is a chart of some of the preventable suffering a loan agreement could prevent:
| Lender | Borrower |
|---|---|
| Borrowed money unpaid | Unpaid bills |
| Loss in value of used house or car | Paid for a house or car with no proof |
| Pay the IRS a gift tax of up to 40% | Pay the IRS income tax on the “gift” |
| Expensive lawyer fees to: | Expensive lawyer fees to: |
| Loss of friendship or family trust | Loss of friendship or family trust |
| Personal safety & well being | Personal safety & well being |
5. Free Loan Agreement Template (PDF & Word Download)
Our loan agreement template addresses the following details:
- Who: The borrower and the lender, or the person taking money and the person giving money
- What: The amount of money or “principal” that is being borrowed, and whether interest or a percentage of the principal is also owed
- When: The date or timetable that the principal and any interest should be repaid back to the lender
Loan Agreement