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If you are planning to borrow or loan money from or to another person or organisation, you should formally record the terms of the agreement in writing. Take a look at how to put a loan agreement together and where to find a free template to help simplify the process.
What's in this guide?
- What is a loan agreement?
- When should I use a loan agreement?
- What does a loan agreement include?
- How effective is a loan agreement?
- Do I need a lawyer to write my loan agreement?
- Get access to customisable loan agreement templates online
- How do I write a loan agreement?
- When to use a promissory note vs. a loan agreement?
- Where to get free legal documents and templates like a loan agreement
What is a loan agreement?
Loan agreements are binding contracts between two or more parties created to formalise a loan process. A loan agreement is designed to define what the parties involved are agreeing to and for how long.
Download this template at Lawpath
When should I use a loan agreement?
A loan agreement can be used when an individual or business lends money to another individual or business. A loan agreement is also used when a written payment plan is needed or when the borrower has to repay back in instalments over a specific time period.
There are many different types of loan agreements. They include basic promissory notes between family and friends to more complicated contracts with professional providers like mortgages, credit cards, personal loans and payday advance loans.
What does a loan agreement include?
Typically, a loan agreement should state the following:
- Full name and address.
- Details of any agreed pricing.
- If interest is to be paid on any outstanding amounts and the relevant interest rates.
- If a debt is to be paid by instalments, the full details of the amounts needed to be repaid.
- The dates when the first and last payments are to be made.
- If payments are to be made by standing order or some other arrangement, then include details.
- If security is to be given for a loan, put down full details of the security.
- State if the people entering into the agreement have taken prior legal advice.
- The document should be signed and dated by all parties.
- The name and details of an independent 3rd party who witnesses the signatures.
How effective is a loan agreement?
A loan agreement can be an effective document for both lenders and buyers. Here are some of the benefits of using a loan agreement template:
- A loan agreement allows a borrower or a lender a way to specify how payments will be made.
- There will be no debate about the obligations a borrower assumes when stated in an agreement.
- Lenders benefit from a written agreement that clearly outlines the rights of both parties.
- A well-written loan agreement can't be transferred or sold to a third party.
Do I need a lawyer to write my loan agreement?
Loans carry a large amount of legal weight. As the loan is a signed agreement, it is a legally binding contract. Breaches of a loan agreement can be severe and can be held up in a court of law. Because there's a lot at stake, it's generally recommended to draft up a loan agreement and show it to a lawyer before signing it.
Get access to customisable loan agreement templates online
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How do I write a loan agreement?
A loan agreement doesn't have to be a long and complicated document. All you need to do is to have in writing what the lender and borrower have agreed, and protection in case the borrower defaults. Start by having an open conversation with the borrower about how much they wish the loan to be and when you wish to be paid back. Some other questions should be considered in this conversation.
- If the loan is to start a business, when is the business expected to turn a profit?
- If a loan is to pay debts, what has already been paid and will it be paid monthly or in a lump sum.
- If the loan is a purchase, will it be shared by another? Consider adding them to the loan agreement.
- Consider how the repayments are to be made, and in what timescale?
- What happens if it goes wrong and they don't pay you back?
If you are struggling to talk about these issues or can't come to an agreement, perhaps a loan agreement is not the right option. When all terms and conditions have been agreed, it is important to get them on paper.
When to use a promissory note vs. a loan agreement?
If the sum is not big and the relationship is trustworthy, a promissory note will help avoid legal issues. If the sum of money being loaned is large and the relationship not trustworthy, a secured loan agreement is a must if you wish to ensure your money is safe. Even if the borrower fails to return the loan as agreed, you will legally be entitled to get your money back.
Where to get free legal documents and templates like a loan agreement
All the terminology and legal jargon may seem a little daunting, especially if your loan involves a large lump sum or you are unfamiliar with the loan process. Here are some online loan agreement templates.
- Law Depot. Law Depot offers a broad array of free online documents to download and customise, including loan agreements.
- TemplateLab. TemplateLab contains a collection of thousands of templates and documents designed to save you hours of work. Their team of writers, designers, business experts and legal professionals works hard to provide you with the best legal templates possible.
- JotForm. With JotForm's PDF Editor, you can customise your agreement template by rearranging the layout and rewriting the text to better specify and meet each party's obligations. Their professional looking forms are designed to offer a hassle-free way to create business and legal documents.
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