Loan Agreement Information
A Loan Agreement is also known as:
- Promissory Note
- Loan Contract
- Promise to Pay
- Term Loan
- Secured/Unsecured Note
- Demand Loan
What is a Loan Agreement?
A Loan Agreement is a document between a borrower and lender, in which the borrower promises to pay back a loan to the lender according to a specified repayment schedule.
Why should I use a Loan Agreement?
Using a Loan Agreement can protect you as a lender because it legally enforces the borrower's pledge to repay the loan in regular payments or a lump sum.
A loan contract is also useful to a borrower because it spells out the details of the loan for his or her records and is handy for keeping track of payments.
What you can use a Loan Agreement for:
- Business loans, such as capital loans for startup businesses
- Real estate loans, such as a down payment on a home or real estate purchase
- Student loans or educational expenses
- Purchases, such as furniture, electronics, vehicle, boat etc.
- Personal loans or IOUs between friends or family
What is the difference between a Loan Agreement and Promissory Note?
Although similar, a Loan Agreement tends to include a more detailed payment schedule, while a Promissory Note is more often used for simple loan terms.
Typically, a Promissory Note only requires the signature of a borrower, whereas the Loan Agreement should include signatures from both parties.
What is included in a Loan Agreement?
Method of Payment
The method of payment is how the borrower intends to pay the lender.
Bill lends his friend Sally $400 for her car payment. She can pay him back in many different ways:
||To be paid
|One lump sum
||Fixed date (e.g. March 3)
||Four months' time
|Regular payments towards interest
||End of term + principal ($400)
|Regular payments towards interest + principal
||Four months' time
The schedule outlines when the loan needs to be repaid by. It can be in one of two ways:
- Fixed date (e.g. May 30)
- Notice to repay/demand loan agreement (e.g. The lender issues a notice to repay for 7 days. The borrower must pay within that time frame).
The schedule also includes how often the money will be repaid, in what amount and when the payment is due (e.g. $200 to be paid on the 1st of each month).
The loan amount is the amount of money being lent to the borrower. Interest can be charged on the loan amount (usually set as a percentage) and this interest is added to the principal amount (or original amount loaned).
You also have the option to compound the interest, which means interest will be charged on the principal amount as well as the previously accumulated interest, resulting in a slightly higher interest rate overall.
Lender and Borrower Details
A Lender and borrower can be either an individual or corporation.
A Loan Agreement may include collateral, which is a form of security for the lender in the event the borrower is unable to repay them.
Common forms of collateral may include a vehicle, equipment, or jewelry.
Should I charge interest in the Loan Agreement?
Interest is a way for the lender to charge money on the loan and compensate the lender for the risk involved with the transaction.
You may choose to begin charging interest or increase the interest rate if the borrower fails to make a payment on time. The increased interest provides you with additional compensation for the borrower's failure to pay as promised and the trouble of having to enforce the Loan Agreement.