Last Updated July 3, 2024
What is a Loan Agreement?
A Loan Agreement, also known as a term loan, demand loan, or loan contract, is a contract that documents a financial agreement between two parties, where one is the lender and the other is the borrower.
This contract specifies the loan amount, any interest charges, the repayment plan, and payment dates. A written contract gives both the borrower and lender a clear outline of the loan terms.
A Loan Agreement may be either secured or unsecured.
Secured: A secured loan is one that is issued and supported with collateral to be used in the event that the borrower can no longer make payments. Collateral is usually a physical asset that can be seized and/or sold off by the lender to pay the remaining loan balance. Collateral can be a car, a house, stocks, or bonds.
If there isn't a collateral clause in the contract, the lender must go to court to seize any of the borrower's assets. With a clause in place, the lender may still have to go to court to seize the collateral, but the process tends to run smoother.
Unsecured: An unsecured loan is one that is issued without collateral. These kinds of loans are more common when loaning money to friends or family members. An unsecured loan may have higher interest rates to offset the risks to the lender for loaning money without collateral.
What can you use a Loan Agreement for?
Customise LawDepot’s Loan Agreement template to suit a variety of purposes, including:
- Business loans, such as capital for a startup business
- Purchases, such as a vehicle, boat, or furniture
- Real estate loans, such as a down payment on a home
- Personal lending between friends or family for debts or bills
What does a Loan Agreement include?
Loan agreements generally include information about:
- 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.
- The lender and borrower. These details include name, address, and whether the lender or borrower is an individual or a corporation. You may also add a co-signer who agrees to pay the debt if the borrower defaults on the loan.
- The loan amount. The amount of money being lent to the borrower is the loan amount.
- Interest and late fees. If the lender charges interest, they may specify the percentage of interest and how it's compounded. The lender may also penalize overdue payments by charging late fees or increasing the interest rate.
- Repayment method. The borrower may repay the loan in a single payment, regular payments, or as otherwise agreed. The agreement should outline the repayment schedule, when the final amount is due, and if the borrower can repay the loan early or in lump sums.
- Collateral and insurance. The borrower may secure the loan with collateral such as a vehicle, equipment, or jewellery. 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.
How do I create a debt repayment plan?
LawDepot's Loan Agreement template allows you to choose from the following methods of repayment:
- Single repayment: The borrower repays the entire loan amount at once (either by a specific date or upon notice to repay).
- Regular payments: The borrower repays the loan in weekly, monthly, or yearly instalments.
- Other: Specify a non-traditional method of payment, such as allowing the borrower to make payments as they are able.
- Early repayment: In addition to the specified payment schedule, the borrower may make lump sum payments at any time to repay the loan early.
- Interest: The lender may charge interest at a certain percentage rate that compounds every month, six months, or year. If the borrower fails to pay on time, the lender may increase the interest rate or charge a late fee.
Should I charge interest in the Loan Agreement?
Interest is a way for the lender to charge money on the loan and compensate for the risk involved with the transaction.
You may choose to begin charging interest or increase the interest rate if the borrower fails to pay 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.
What happens if the borrower or lender dies before repaying the loan?
If the borrower dies before paying off the loan, authorities will use their assets to pay the remainder of the debt. If there is a co-signer, the responsibility for the debt falls to them.
If the lender dies before receiving the complete repayment, the borrower owes to the lender’s estate. In this case, the beneficiaries of the lender’s estate will collect the remainder of the debt.
If the loan is for a significant amount, it’s important that you update your Last Will to specify how you want to deal with the outstanding loan upon your death.