A loan agreement is a written contract detailing a loan arrangement between two parties, usually friends or relatives. It can also be drafted between a borrower and an official lender such as a bank.

A loan agreement is also known as money lending agreement, business loan agreement, loan contract, and sometimes a personal loan agreement. The document not only outlines the loan stipulations but also protects the involved parties when a dispute arises.

For a comprehensive loan contract tailored to your needs, the assistance of a competent and experienced attorney is critical.

Why is a Loan Agreement Necessary?

You don’t want to loan money to anyone without having a contract in place. The agreement assures you of repayment and serves as a reliable backup when you sue the other party for breaching the agreed-upon terms.

The money lending agreement also serves as proof that the loaned money was not a gift as would be claimed by people trying to avoid repayment.

Features of a Loan Agreement

Basic Information

The contract must contain comprehensive information about the parties agreeing to the terms, including the borrower, lender, and co-signer. Either party can be a business, rather than an individual. Besides, the borrowers can be two or more individuals, whose information must be included in the agreement.

The agreement should also have the full legal name and address of the guarantors (if present), who must agree to the terms before signing the document.

Loan details

Specific loan details include information about loan transaction, payment, and interest,

In the transaction section, you outline the principal amount of the loan while the payment section describes the accepted loan repayment methods and frequency. The borrower can pay the loan monthly, on-demand basis, or lump sum. Payment methods include wire transfer, credit card, cash, etc.

If you are charging interest, it’s a requirement to add the interest section. Here, you need to outline whether the interest is simple or compound in nature and whether the interest rate is variable or fixed.

Collateral and Violation

As a lender, you can request the borrower to guarantee repayment with collateral, which can be a vehicle, property, or any other valuable item.

No party expects the other party to violate the terms of the contract, but unfortunately, it happens several times. It, therefore, becomes imperative to include a section that defines what happens when the borrower violates the agreed-upon terms. It could be taking over the ownership of the collateral.

In this section, also define the duration after which payments are considered late as well as the late fee.

Can you Change the Terms of the Loan?

The terms of the loan agreement bound you once you sign the document. However, some lenders are willing to collaborate with the borrowers to ease the payment process, and hence may allow a temporary change of terms or offer a new loan with new conditions.

You don’t need to request for changes in terms. Before signing the document, be sure that you can meet the terms to prevent inconveniences in the future.