Free Loan Agreement Template

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.

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:

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:

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.

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 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.

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 it is important that the borrower agrees upon 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 court 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

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

Frequently Asked Questions