A Loan Agreement is a legal document between a lender and borrower that outlines a loan’s terms and conditions. It includes the amount, repayment schedule, interest rate, and consequences of non-payment. 

Use a Loan Agreement anytime you lend or borrow money to clearly define terms and protect all parties.

A Loan Agreement documents the lending terms between two parties. The parties may be individuals or organizations. The following are common circumstances that may require a Loan Agreement:

• Personal lending between friends or family
• Business transactions, such as securing capital for a startup 
• Financing large purchases, such as a vehicle, boat, or furniture
• Borrowing for real estate purchases and down payments
• Student loans for tuition and other educational expenses

Loan Agreements protect lenders by legally enforcing the borrower's pledge to repay the loan in regular payments or lump sums. Additional benefits include:

• Clarity: Prevents misunderstandings by clearly outlining terms
• Legal enforcement: Serves as a legally binding contract in case of default, when verbal agreements cannot provide the same protection in court
• Documentation: Acts as official proof of the loan for legal or tax purposes
• Relationship protection: Sets clear expectations, helping preserve personal or professional relationships

LawDepot’s comprehensive Loan Agreement template includes prompts to gather the following information:

1. Lender and borrower contact information

Include details of both the lender and the borrower, including their full names and addresses.

2. Loan amount and date

Identify the purpose of the loan, such as whether it’s for business, debts, real estate, a vehicle, or another expense. Include the amount and when the lender will transfer the money to the borrower.

3. Interest rate

Specify the annual percentage rate (APR) of the loan charges.

4. Repayment method and schedule

The loan may specify whether the payment will be paid in a lump sum or through regular payments. If regular payments are chosen, identify the frequency of the payments (e.g., monthly, quarterly), the amount of each payment, and the total length of the loan term.

5. Late fees and penalties

Include any additional charges the loan will incur for late or missed payments.

6. Co-signer information

Determine whether a co-signer must also sign for the loan. A co-signer agrees to pay the debt if the borrower defaults. Including a co-signer can provide the lender with additional security.

7. Collateral

The borrower may secure the loan with collateral (e.g., a valuable item such as a vehicle, equipment, or jewelry). The lender may seize the collateral asset if the borrower cannot repay the full loan amount.

8. Additional clauses

LawDepot’s template includes standard legal provisions that provide crucial protections. Here are a few explanations:

• The acceleration clause allows the lender to demand immediate repayment of the outstanding loan balance if the borrower violates the agreement (e.g., misses several payments)
• The severability clause states that if one part of the agreement is unenforceable, the rest remains valid and in effect

Whether you charge interest as a lender often depends on your relationship with the borrower and the loan amount. LawDepot’s step-by-step, customizable template makes including a fair interest rate easy.

A lender isn’t legally required to charge interest on a personal loan. However, charging interest can assist with:

• Risk compensation: Charging interest compensates the lender for the risk they are taking by lending money.
• Inflation protection: Interest helps to ensure that the value of the money you lend is not eroded by inflation over time.
• Tax implications: In some jurisdictions, not charging a minimum level of interest can have tax consequences. Therefore, it's advisable to consult with a tax professional regarding the repercussions of interest-free loans.

For personal loans, the Internal Revenue Service (IRS) recommends minimum interest rates that you should charge for below-market personal loans above $10,000. Still, setting a rate can be challenging. Here are some guidelines:

1. Assess the risk

A higher interest rate is reasonable for a higher-risk loan. For a low-risk, secured loan to a trusted individual, you might charge a rate closer to the prime rate.

Examples of high-risk loans include:

• The loan is unsecured, which means it isn’t backed by any collateral 
• The borrower has a poor credit score or inadequate income 
• There is no co-signer on the loan 

2. Check legal limits

Many jurisdictions have usury laws that cap the maximum interest rate you can legally charge a borrower. Check your state’s usury laws to learn the appropriate interest rate in your area. 

A Loan Agreement is ideal for complex or high-value loans, while a Promissory Note suits simpler, low-risk arrangements.

Here’s a quick comparison:

In conclusion, you can use a Loan Agreement for complex lending situations, large sums of money, business loans, or any situation where you want detailed recourse and clear, enforceable terms. It is the safest option for both parties.

You can use a Promissory Note for simpler, low-risk borrowing. For example, a small, short-term loan to a trusted family member where the relationship is strong and the terms are straightforward.

Witnessing

As a general rule, it is recommended that a Loan Agreement is signed in the presence of a witness (i.e., a neutral third party). However, witness requirements for Loan Agreements vary by jurisdiction.

While not always mandatory, having a witness sign the agreement is highly recommended for a few key reasons:

• Adds credibility: A witness can attest that the signatures on the agreement are genuine and that the parties entered the agreement willingly
• Discourages disputes: The presence of a witness can deter either party from later claiming they did not sign the document or were forced to do so
• Strengthens legal standing: Should a legal dispute arise, the witness can be called upon to provide testimony

Notarization

A notary public is a person who specializes in verifying signatures and deterring fraud. If a borrower denies entering a Loan Agreement, their previously notarized signature can prove they willingly signed the contract.

Notarization can also eliminate the need for witnesses to testify in court in case of a legal dispute. As such, lenders should consider having all parties sign before a notary public to ensure the document’s legal enforcement.

LawDepot offers a convenient Online Notary service, so you can get your Loan Agreement notarized from anywhere in the United States. Simply connect with a notary public using your phone, tablet, or computer.