Last Updated July 3, 2024
What is a Loan Agreement?
A Loan Agreement is a contract between a lender and borrower that outlines the terms and conditions of a money loan.
Use LawDepot’s Loan Agreement template to create a simple contract between:
- Businesses (i.e., intercompany loans)
- Parents and children
- Other family members
- Friends
Why is a Loan Agreement important?
Private loans often occur without any ties to a bank or credit union. So, even though private loans are less formal than those from official money lenders, it’s important to use a Loan Agreement so that both parties understand their obligations to each other.
If a dispute arises, they can refer to the document for clarity on their rights and responsibilities. On the other hand, if the dispute escalates, a written contract is essential evidence in court.
How do I write a Loan Agreement?
Customise LawDepot’s Loan Agreement template to suit your needs. Whether you’re creating a loan for a friend or a business, the general structure of your contract will be the same.
Our template includes all the important items that are found in a standard Loan Agreement. Of course, you can add, delete, or edit items as you see fit. When you’re ready, save your document as a PDF or print a copy for your records.
Write your Loan Agreement in four easy steps:
You can use this template whether you’re the borrower or the lender in this agreement. In any case, you should clearly specify the purpose of the loan. For example, common reasons for private lending include:
- Business loans (e.g., capital for a startup)
- Asset purchases (e.g., to finance a vehicle, boat, or furniture)
- Real estate loans (e.g., helping a child make a down payment on a home)
You should also state the location where the loan will occur. Often, people select the lender’s location. But, if the loan is for an asset purchase, you might choose to list the location of the asset instead.
2. Record party details
State the name and address of both the borrower and lender, and specify whether they are an individual or a corporation.
If needed, add the details of a co-signer as well. A co-signer is someone who agrees to accept responsibility for the debt if the borrower defaults. This gives reassurance to the lender, especially if the borrower has a poor credit history.
3. Outline the terms of the loan
State the amount of money the lender will provide to the borrower. There’s no minimum or maximum amount. It’s up to the lender to decide how much they’re willing to lend, although smaller loans may have more flexible terms than larger ones.
In any case, the lender may charge interest to encourage consistent payments. If so, they should specify the percentage of interest and how often it’s compounded (e.g., monthly, every six months, or yearly). Compound interest is based on both the original loan amount and the accumulated interest from previous periods.
The lender may also charge late fees or increase the interest rate to penalize overdue payments. This compensates the lender for the borrower's failure to pay and for the trouble of having to enforce the Loan Agreement.
Remember: if the lender will earn money on the loan, it’s important to consider any related tax implications.
Next, outline the repayment terms, including:
- The repayment schedule
- When the final amount is due
- How repayment is made (e.g., single payment, regular payments, or another flexible option)
- If the borrower can repay the loan early or in lump sums
Finally, if needed, you can state whether the lender requires collateral and/or insurance. This is called a secured loan because the borrower “secures the loan” with collateral such as a vehicle, equipment, or jewellery. If the borrower can’t repay the full loan amount, the lender may seize the collateral. The lender may also require the borrower to obtain insurance if using the loan to buy a vehicle.
4. Add final details as needed
Our template allows you to write your own clause if you feel there’s anything missing from your Loan Agreement. For example, the lender may want to charge a fee if the borrower repays the loan early. We’ll also provide tips on how to write a clause that fits the agreement.
Does a Loan Agreement need to be witnessed?
Generally, the law doesn’t require witnesses for a Loan Agreement. However, if you’re creating a loan for an uncommon purpose, it’s a good idea to check the witness requirements in your jurisdiction. For instance, a witness or notary may be required when a loan transaction includes documentation that is governed by laws outside the U.K.
Even if it’s not required, using a witness is a best practice whenever you create a contract. This is because the witness helps verify the signatures and strengthen the evidence of a binding agreement. If a dispute were to arise, this would be crucial for enforcing the contract.
Is a Loan Agreement legally binding?
There are certain requirements for a Loan Agreement to be a valid contract. These are legal elements that all contracts must contain in order to be binding.
- Offer and acceptance: The lender offers a certain amount of money to the borrower, on the condition that they meet certain terms for repayment. The borrower accepts the offer.
- Consideration: Each party exchanges something of value. In this case, the borrower gets a certain amount of money, and the lender gets a promise to be repaid. The lender may also benefit from interest charges or late fees.
- Intention: The parties mutually agree to enter into a binding contract. This element is also known as a “meeting of the minds”.
- Legality: All elements of the contract must abide by the laws of the United Kingdom. For instance, the loan cannot be made for a purpose that is against the law (e.g., funding an illegal operation).
- Capacity: Each party must have the legal capacity to enter the contract, which means they’re competent adults.
How do I enforce a Loan Agreement?
The first step a lender might take to enforce their Loan Agreement is to send a Demand Letter. This is a formal notice reminding the borrower of their obligations to repay their loan on time. Usually, this letter states how much the borrower must pay and the deadline for doing so.
If the borrower continues to miss payments, the lender could negotiate a new repayment plan. Otherwise, they might take legal action. This can include hiring a debt collection agency or filing a lawsuit.
Can you cancel a Loan Agreement?
If you think cancellation is a possibility, it might be best to add a clause that addresses how either party may cancel the contract. Otherwise, it can be difficult to back out of a Loan Agreement.
If possible, the parties may negotiate a way to modify the Loan Agreement so that they both can fulfill their obligations. You can use LawDepot’s Contract Addendum to document any changes to your agreement. In this case, the original Loan Agreement remains in place; the addendum will simply add or modify terms to the existing contract.
