Last updated May 5, 2022
What is a Loan Agreement?
A Loan Agreement is a document between a borrower and lender that details a loan repayment schedule.
You can use our Loan Agreement template for a variety of purposes, including:
- 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
What is the difference between a Loan Agreement and a Promissory Note?
A Loan Agreement is slightly more comprehensive than a Promissory Note and includes clauses about:
- Amendments: Both parties in the contract must agree in writing to any term changes.
- General Provisions: The headings in the Loan Agreement are for clarity and are not meant for courts to interpret when enforcing the contract. Likewise, singular nouns mean and include plural forms; any masculine and feminine words are interchangeable.
- Entire Agreement: The written contract constitutes the entire agreement between the parties. There are no other provisions, oral or otherwise.
You can use a Loan Agreement for loans of a large amount or that come from multiple lenders. Use a Promissory Note for loans that come from non-traditional money lenders like individuals or companies instead of banks or credit unions.
Why should I use a Loan Agreement?
Using a Loan Agreement protects you as a lender because it legally enforces the borrower's pledge to repay the loan in regular payments or lump sums.
As a borrower, you may also find a loan contract useful because it spells out the details of the loan for your records and helps keep track of payments.
What does a Loan Agreement include?
1. The location
People usually choose the lender's location for the Loan Agreement, but if the agreement is for the purchase of assets, then the parties might choose to list the location of the assets instead.
Each state has different laws regarding Loan Agreements. The state you list in your location determines which jurisdiction’s laws will be used to enforce the agreement and resolve any disputes that may occur.
2. Details about the lender and borrower
Provide the names and addresses of the parties involved, including whether they are individuals or corporations. You may also add a co-signer who agrees to pay the debt if the borrower defaults on the loan.
3. The loan amount and loan date
The amount of money being lent to the borrower is the loan amount, also known as the principal amount. Also include the date that the principal amount will be lent to the borrower.
4. Interest and late fees
If the lender charges interest, they may specify the percentage of interest and how often it compounds (monthly, every six months, or yearly). The lender may also penalize overdue payments by charging late fees or increasing the interest rate.
5. The repayment method
The borrower may repay the loan in a single payment or in regular payments. The agreement should outline the repayment schedule, including when the final amount is due and if the borrower can repay the loan early or in lump sums.
6. Collateral and insurance
The borrower may secure the loan with collateral (e.g., a valuable item such as a vehicle, piece of equipment, or jewelry). In this case, the lender may seize the collateral if the borrower cannot repay the full loan amount.
The lender may also require the borrower to obtain insurance if using the loan to buy a vehicle.
Should I charge interest in the Loan Agreement?
Lenders who want compensation for the risk involved when lending money typically charge interest.
You can also begin charging interest (or increase the original 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.
If this is a personal loan, note that the Internal Revenue Service (IRS) recommends minimum interest rates that you should charge for below-market personal loans above $10,000.
Do you need a witness for a Loan Agreement?
Most jurisdictions do not legally require Loan Agreements to be witnessed. However, a witness can verify the signatures on the contract and provide testimony to the binding nature of the agreement.
Local laws may specify witness requirements, but typically a witness to a Loan Agreement can be any neutral third party (with no financial or other interest in the contract).
Notarizing your Loan Agreement
A notary public specializes in verifying signatures and deterring fraud. If a borrower denies entering into a Loan Agreement, a notary acknowledgment can prove that they knowingly signed the contract. Notarization can also eliminate the need for witnesses to testify in court. As such, lenders should notarize their Loan Agreement if they want to ensure the document’s legal enforcement.
LawDepot’s Loan Agreement template gives you the option to include a Notary Acknowledgement in your document.
