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Home Personal & Family Documents Loan Agreement

Free Loan Agreement Template

Use our free Loan Agreement template to detail the terms of a loan.

Updated January 18, 2023 | Legally reviewed by Brooke Davis

A loan agreement is a legal contract between a borrower and a lender. It establishes how much money is being borrowed and sets other terms of the loan, including the repayment schedule and interest, if applicable.

You should use loan agreements when you lend or borrow money, with or without interest. This includes:

  • Lending or borrowing money within your family
  • Lending or borrowing money from your friends
  • Borrowing money from an institution to finance a home, car, or university tuition
Table of Contents
  • What Is a Loan Agreement?
  • Who Needs a Loan Agreement?
  • When To Use a Loan Agreement
  • How To Write a Loan Agreement
  • Loan Agreement Sample
  • Frequently Asked Questions

What Is a Loan Agreement?

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.

The borrower agrees that the borrowed money will be repaid to the lender at a future date, often including interest. In exchange, the lender can’t change their mind and decide not to lend them money, especially if the borrower relies on the lender’s promise and makes a purchase expecting they’ll receive the loan.

A loan agreement is sometimes called:

  • Business loan agreement
  • Loan contract
  • Personal loan
  • Promise to pay
  • Secured/unsecured note
  • Term loan

What’s the Difference Between a Loan Agreement, Promissory Note, and IOU?

A loan agreement is generally 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 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.

Here is a simple chart explaining the difference between an IOU, a promissory note, and a loan agreement.

LoanPromissory NoteIOU
promise to repay promise to repaypromise to repay
steps for repaymentsteps for repayment
timeline to repaytimeline to repay
legally bindinglegally binding
signature of borrowersignature of borrower
signature of lender
repay in installments
consequences of defaulting (i.e. right to foreclosure)

For more detailed information, you can view our article on the differences between the three most common loan forms.

How Will the Money Be Repaid?

The loan agreement should detail how the borrower will pay the money back and what happens if the borrower cannot 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 dateSpecific due dateSpecific due dateNo specific due date
Payments for principal and interest are made at regular intervalsPayments for interest only are made at regular intervals, principal amount due on maturity dateEntire amount owed, including interest, is paid all at onceEntire 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 dateExample: $500 monthly payment is applied only towards interest and full $10,000 loan amount is due on the maturity dateExample: $10,000 loan for a friend’s small business is due on a specific dateExample: $10,000 loan for a friend's small business is due at any time or whenever financially feasible

Types of Loan Agreements

There are many different types of loan agreements, including:

Co-sign Loan

If you co-sign a loan for someone else, such as your spouse or child, you’ll be equally responsible for repaying the loan. The lender can approach you for repayment if they cannot collect a payment from the borrower.

Fixed-rate Loan 

A fixed-rate or term loan has an interest rate that stays the same for the entirety of the loan’s term. Your lender sets the interest rate when issuing your fixed-rate loan. For example, a 30-year fixed-rate mortgage at 4% maintains the same interest rate for the whole 30-year period.

Secured Loan

Secured loans are personal or business loans that require collateral as a precondition for borrowing, typically a home or vehicle. If you stop paying the loan, the lender can seize the property you used to secure the loan. For example, the bank can start a foreclosure proceeding in a mortgage loan by auctioning off your home and using the proceeds to repay the remaining amount.

Common examples of secured loans include:

  • Life insurance loans
  • Vehicle loans
  • Mortgages
  • Secured credit cards
  • Car title loans
  • Bad credit loans

Unsecured Loan

In contrast to secured loans, unsecured loans don’t require collateral and are only backed by a contract. This kind of agreement results in less paperwork and faster approvals. However, it may be challenging to obtain an unsecured loan if you don’t have a good credit score. You may also have to pay a higher interest rate for unsecured loans.

One of the most popular types of unsecured contracts is a signature loan. Also known as a character loan or good faith loan, a signature loan requires only your signature and a promise to pay. Other examples of unsecured loans include most credit cards and student loans.

Variable-rate Loan

Variable-rate loans have interest rates that change over time. However, their rates may be fixed for a few years at the beginning of the loan.

The underlying index or interest rate for variable rates depends on your security or loan, but it’s most commonly based on the federal funds rate set by the Federal Open Market Committee (FOMC). [1]

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 LenderPossible Borrower
Seller of a home Buyer of a home
Seller of a car Buyer of a car
Investor Startup company
Family memberFamily member
  • uncle or aunt helping their favorite family member
  • nephew or niece paying for education or a wedding
  • older wealthier family member divesting estate (i.e. grandparents)
  • younger less wealthy family members in need of financial assistance (i.e. grandchildren)
  • Sympathetic friend with extra funds (i.e. able to lend but not give money)Reliable friend with unexpected debt (i.e. unforeseen medical bills)

    When To Use a Loan Agreement

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

    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 spell out any installment payment terms and the amount of interest owed.

    If one party does not fulfill their side of the bargain, having this agreement in writing has the added benefit of recording both parties’ understanding of the consequences involved.

    If a disagreement arises later, a loan 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 with a capital loan [2]
    • 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). [3]

    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. [4]

    Loan agreements can also help you determine which lenders to avoid. People or institutions who lend money at high-interest rates may be loan sharks. Loan sharks use predatory loan tactics to charge high rates, leading to a vicious debt cycle.

    IMPORTANT

    If you see an exorbitantly high-interest rate on your loan agreement, you should back out.

    What Happens If I Don’t Have a Loan Agreement?

    A simple loan agreement details how much was borrowed, 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:

    LenderBorrower
    Borrowed money unpaid Unpaid bills
    Loss in value of used house or carPaid 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:
  • recover damage to property
  • obtain the deed to a house
  • battle alleged ownership
  • obtain the title to a car
  • pursue debt collection
  • fight debt collectors
  • Loss of friendship or family trustLoss of friendship or family trust
    Personal safety & well beingPersonal safety & well being

    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:

    An example of where to include information about the parties involved in a loan agreement
    An example of where to include information about the parties involved in a loan agreement

    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.

    An example of where to include the loan amount in our loan agreement template
    An example of where to include the loan amount in our loan agreement template

    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.

    An example of where to include information about repayment in our loan agreement template
    An example of where to include information about repayment in our loan agreement template

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

    If you want the loan to be 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.

    An example of where to include information regarding collateral in our loan agreement template
    An example of where to include information regarding collateral in our loan agreement template

    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.

    An example of where to include information regarding guarantors and co-signers in our loan agreement template
    An example of where to include information regarding guarantors and co-signers in our loan agreement template

    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 it is important that the borrower agrees upon this rate.

    An example of where to include the interest rate in our loan agreement template
    An example of where to include the interest rate in our loan agreement template

    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.

    An example of where to include late payment fees in a loan agreement
    An example of where to include late payment fees in a loan agreement

    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.

    An example of where to include prepayment information in our loan agreement template
    An example of where to include prepayment information in our loan agreement template

    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.

    An example of where to include acceleration details in our loan agreement template
    An example of where to sign in our business loan agreement template

    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.

    An example of where to include communication preferences in our loan agreement template
    An example of where to include communication preferences in our loan agreement template

    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.

    An example of where to include your resident state or jurisdiction in our loan agreement template
    An example of where to include your resident state or jurisdiction in our loan agreement template

    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 court case will have to pay the other party any costs and fees related to the court process.

    An example of where to specify how you would like to handle disputes in our loan agreement template
    An example of where to specify how you would like to handle disputes in our loan agreement template

    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.

    An example of where to sign in our loan agreement template
    An example of where to sign in our loan agreement template

    What Should Be Included in a Loan Agreement?

    You should always include the following in your loan agreement:

    Basic elements

    • 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

    Other details

    The contract may also include these provisions:

    • 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

    Loan Agreement Sample

    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 paid back to the lender

    This Loan Agreement template has been updated for 2023.

    Adobe PDF
    Microsoft Word (.docx)

    Frequently Asked Questions

    Does a personal loan agreement need to be notarized?

    It’s not necessary to notarize a personal loan agreement. However, you may want to notarize the document if it involves a large sum. Notarization will help prove the document’s validity if challenged in court.

    Is a personal loan agreement legally binding?

    Yes, a personal loan agreement is legally binding. Whether the lender is a financial institution or an individual, the court will uphold the loan terms as long as both parties sign the agreement.

    If you are the borrower, it is crucial to ensure you can repay the loan, as the lender will have the right to sue you in court for the amount owed. If you cannot pay the lender back, you must provide other means of compensation, such as giving up some of your assets or garnishing your wages.

    Can you cancel a loan agreement?

    Yes, in certain instances, you can cancel a loan agreement. There should be a section on termination in the document’s terms and conditions. It should provide you with everything you need to know about getting out of the contract. 

    Legal Templates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we keep our content accurate, reliable and trustworthy.

    1. Effective Federal Funds Rate. https://www.newyorkfed.org/markets/reference-rates/effr
    2. Working Capital Loan. https://investinganswers.com/dictionary/w/working-capital-loan
    3. Applicable Federal Rates (AFRs) Rulings. https://www.irs.gov/applicable-federal-rates
    4. Gift Tax. https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax

    Related Personal Finance Documents

    • Demand Letter for Payment: An Demand For Payment Letter is a formal, written document demanding payment of an outstanding debt.
    • Purchase Agreement: Outlines the terms and conditions of an item sale.
    • Business Purchase Agreement: A legally enforceable contract that documents the sale of a business.
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    Loan Agreement Template

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