Loan Agreement Template

A loan agreement is a written contract between a lender and a borrower that can be enforced in court if one party does not hold up their end of the bargain. It establishes how much money is being borrowed and sets other terms of the loan, including the repayment schedule and interest, if applicable.

Table of Contents

• Loan Agreements By Type
• When To Use a Loan Agreement
• How to Get a Personal Loan
• Loan Agreement Terms
• How To Write a Loan Agreement
• Loan Agreement Sample
• Frequently Asked Questions

Loan Agreements By Type

When To Use a Loan Agreement

You should use a written loan agreement whenever you lend or borrow money.

Here are some situations where you may need a loan agreement:

• Starting a business with a capital loan [1]
• Purchasing land or a home with a real estate loan
• Investing in a college education or repaying a student loan
• Buying a new car or boat
• Getting a paycheck advance from an employer
• Helping a friend or family member out with a personal loan

When making a loan agreement contract between family members, you should be aware that there can be tax implications. For example, if you lend money without interest, the IRS may charge you tax because it would be below the minimum interest rate required for family loans. This is commonly known as the Applicable Federal Rate (AFR). [2]

Also, if you’re borrowing money from family or friends and aren’t expected to pay the loan back, the IRS will consider the loan a gift and charge you income tax. [3]

Loan Agreement vs. Promissory Note

A loan agreement is generally more formal and less flexible than a promissory note. This agreement is typically used for more complex payment arrangements and often gives the lender and borrower more protections, such as borrower representations, warranties, and covenants.

In a loan agreement, a lender can accelerate the loan if the borrower defaults. So 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.

For more detailed information, you can view our article on the differences between a loan agreement and promissory note.

How to Get a Personal Loan

Check Your Credit Score.

Your credit score is your financial picture. Lenders consider this when assessing your loan application. The higher your credit score, the better chance you can be qualified for a loan. You can obtain your credit score from various credit bureaus or online platforms.

Compare Lenders.

Take some time and shop around for the best personal loan option. Research and compare lenders based on interest rates, fees, repayment terms, and customer reviews.

You have several options to find personal loans; banks, credit unions, and online lenders. 

• Banks could be the best option if you have a good to excellent credit score. They offer low-interest rates, few fees, and flexible repayment terms.
• Credit unions offer loans to members of the credit union. They have lower interest rates and fees and can’t charge more than 18% APR (annual percentage rate) on personal loans.
• Online lenders let you pre-qualify, apply for, and receive personal loans online, but they have higher APRs and fees than banks and credit unions.

Gather Necessary Documents.

Lenders request several documents to verify the information. It allows the lender to ensure whether you meet the requirements. These typically include proof of identity (like a driver’s license or passport), proof of income (such as pay stubs or tax returns), bank statements, rental or mortgage agreement, and other financial information.

Get Prequalified for a Loan.

Many lenders offer a prequalification process. This involves a soft credit check that estimates the loan amount and interest rate you might qualify for. Thanks to prequalification, you can preview the potential offers you may get from lenders and narrow down them based on potential interest rates, fees, terms, and amounts.

It doesn’t guarantee that you’ll get a loan or that you have to accept one.

Start the Application Process.

If satisfied with the prequalification terms, pick one that matches your needs and proceed with the formal loan application. Complete the application form with accurate information, finalize the documents, and accept the terms.

Accept the Loan.

After applying, if you receive loan offers, review them carefully. Pay attention to the loan amount, interest rate, repayment term, and associated fees, and read and understand the fine print. You can accept the offer and sign the loan agreement if all details meet your needs.

Loan Agreement Terms

• Borrower: (aka the “buyer” or “payer”) who is receiving the loan from the lender and is responsible for repaying the debt
• Lender: (aka the “issuer”, “maker”, “payee”, or “seller”) who is giving the borrower money and receives the repayment
• Principal amount: the sum of money being borrowed
• Interest: additional money owed, usually a percentage, based on the amount borrowed and time until repayment
• Maturity date: when the money should be repaid
• Acceleration: whether the lender can increase the repayment date or make the borrower repay the loan immediately. Possible events of acceleration include:
  • If the borrower becomes bankrupt
  • If the borrower fails to make payments
  • If the borrower passes away or the company dissolves
  • If the borrower wants to pay off the note early
  • If the borrower sells off a significant or material portion of their assets
• Amendment: any changes to the agreement, which must be in writing
• Collateral: what property the lender can keep if the borrower defaults
• Governing law: which state laws apply if there is a problem with the agreement
• Joint and several liabilities: states that all of the borrowers are individually responsible for the full amount of the loan
• Late charges: states that the borrower pays the penalty if payment is late
• Prepayment: allows the borrower to pay off the loan and interest early, possibly for a discount
• Right to transfer: allows the lender to transfer the loan to another party

How To Write a Loan Agreement

Here’s a step-by-step on writing a simple Loan Agreement with a free Loan Agreement template.

Step 1 – Name the Parties

A Loan Agreement should detail the name of the lender and borrower. It should include their legal name, not informal designations or “nicknames.” This legally identifies the parties involved in the loan, so a proper legal designation of the parties is essential. The initial section of your agreement should look like this:

Step 2 – Write Down the Loan Amount

Provide the amount you will be loaning the borrower. This amount is referred to as the ‘principal sum’. It does not take into account the total amount, including interest.

Step 3 – Specify Repayment Details

This section is where you must provide the details of the borrower’s loan repayment. The options you choose will have to be mutually agreed upon. You can choose whether the loan will be repaid in regular payments or at once.

Regular Payments: The borrower repays the lender in a set number of payments over a set period of time as specified in the document.

Single Payment: The borrower repays the lender all at once by the date specified by the lender OR “on-demand” by the lender. With a “Due on Demand” payment option, the borrower repays the loan upon the lender’s demand.

If you choose regular payments, you must specify the repayment schedule, which can be monthly, quarterly, semi-annual or annual installments.

Step 4 – Choose How the Loan Will Be Secured (Optional)

If you want the loan secured, you can include the property the borrower has put up for collateral here. Make sure you are specific, providing as many relevant details as possible. Both parties must mutually agree upon this property for it to be legally valid in court.

Step 5 – Provide a Guarantor (Optional)

A cosigner or guarantor is optional and protects the lender if the borrower defaults on the Loan Agreement. You may require a cosigner if the borrower is in questionable financial standing. The cosigner is someone who jointly signs the agreement with the borrower.

If the borrower defaults and cannot pay back the amount in full, the cosigner is responsible for paying you back the due amount. The cosigner is usually someone in good financial standing or has excellent credit.

Step 6 – Specify an Interest Rate

You should include the interest rate you will be charging the borrower in a percentage. This interest rate will be applied to the principal amount of the loan, and the borrower must agree to this rate.

Step 7 – Include Late Fees (Optional)

As a lender, you can charge late fees if the borrower does not meet a payment in time. Including a late fee can motivate the borrower to make payments on the agreed dates.

Step 8 – Determine Options for Prepayment

You can include whether penalties or discounts will be applied if the borrower decides to pay the loan amount ahead of schedule. Alternatively, you can explicitly state that the agreement does not allow prepayment of the loan.

A penalty is usually applied to deter the borrower from paying the loan back early and to encourage long-term payments. The loan would then accrue more interest, which can be a favorable arrangement if you’re the lender.

Step 9 – Include Provisions for a Default

When the borrower cannot repay the loan as detailed in the loan agreement, the borrower has entered into default. You should clarify how the borrower will default in the document. Loan agreements can say missing one payment causes a default, but you can be more lenient with the terms as a lender.

Defaulting on a loan can give you the legal right to accelerate payment. In this scenario, you can make the full loan amount due immediately.

Step 10 – Add in Relevant Terms

Further terms make up the remainder of the loan agreement and serve to protect the rights of both parties and they include provisions such as:

• The legal right of the lender to enforce the terms of the agreement
• The costs and expenses associated with taking the case to court
• The transferability of the loan agreement
• The capability of alterations to the agreement

Step 11 – Specify How You Would Like To Communicate

You can establish communication methods for yourself and the borrower, so both parties are on the same page. This avoids either party claiming that they didn’t receive a notice.

Step 12 – Include Your Resident State

Clearly indicate your resident state in the loan agreement so both parties know which state or jurisdiction laws they must follow.

Step 13 – Determine How Disputes Will Be Resolved

Detail the procedure for how both parties can resolve any disagreements. There are numerous options available, ranging from court litigation to mediation. Remember that pursuing court litigation will mean the party who lost the case will have to pay the other party any costs and fees related to the court process.

Step 14 – Include All Relevant Signatures

The parties involved in the loan agreement should sign the agreement. This includes any personal guarantors or co-signers.

Loan Agreement Sample

Frequently Asked Questions