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If you're planning to loan money to someone, and the borrower won't be providing a secured asset, you'll want to formalise the arrangement with an unsecured loan agreement.
Fortunately, there are a range of customisable templates online that offer a great starting point to ensure you'll be protected if the borrower fails to meet the terms of their loan. Let's take a look.
What is an unsecured loan agreement?
An unsecured loan agreement is a contract stipulating the terms of an unsecured loan (a type of 'personal loan') between a lender and a borrower. 'Unsecured' means there is no security (usually an asset such as a car or home) attached to the loan to secure repayment if the borrower defaults. Because of this, unsecured loans are considered to be a higher risk to the lender and this is often reflected in higher interest rates.
Get a loan agreement template
Download this template at Lawpath
More on where to get unsecured loan agreement templates
- Lawpath. Lawpath is an online legal resource where you can get a free customisable loan agreement if you sign up. You'll need to customise it to remove any mention of secured assets.
- LawDepot. LawDepot has a huge range of free online legal documents, including an unsecured loan agreement which can be filled in on the website and then downloaded.
- LegalVision. LegalVision is a subscription service offering unlimited use of legal document templates and consultations with lawyers for $199 a month.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
When should I use an unsecured loan agreement?
If you're planning to loan money to someone, you should use an unsecured loan agreement. The document should be written up and signed before any money exchanges hands. Having an unsecured loan agreement in place helps both parties to clearly understand their responsibilities under the contract.
It's important for the contract to spell out all details of the arrangement. This includes particulars on things like how much interest is to be paid and what happens if the borrower defaults on the loan.
Unsecured loans are generally used for one-off expenses such as financing a wedding or holiday, consolidating debt or undergoing home renovations.
What does an unsecured loan agreement include and not include?
Unsecured loan agreements are relatively simple documents setting out the conditions of the contract. These are the typical features of unsecured loan agreements:
- Details of the lending and borrowing parties
- Details of guarantor (if a guarantor is involved)
- The loan clause
- Repayment plan details
- Rates of interest
- Repayment clause
- Variations and waivers
- Default clause
- Default interest
- Enforcement expenses, in the event a default occurs
Typically not included
- Details of secured assets (because there are none involved).
How effective is an unsecured loan agreement?
An unsecured loan agreement can work as a very effective contract between lenders and borrowers. A well-thought-out agreement will provide information on any issues that might arise during the course of the loan and provide resolutions.
An unsecured loan agreement can help do the following:
- Remove ambiguity on how much is being borrowed and when it must be repaid
- Provide mechanisms for resolutions should the borrower default on the loan
- Allow the lender or borrower to stipulate how repayments will occur.
Unsecured loan agreement vs secured loan agreement
As discussed above, an unsecured loan agreement is a contract between a lender and borrower that is not secured by an asset. A secured loan, on the other hand, is secured by a financial or physical asset belonging to the borrower. This means that if the borrower defaults on the loan, the lender may take possession of the borrower's asset/s specified in the agreement to sell and ensure repayment of the loan.
Weighing up whether or not to use a lawyer
Strictly speaking, a lawyer is not required to draft an unsecured loan agreement. However, if you're seeking more peace of mind and you'd prefer to enlist professional help, using a lawyer will of course save you the effort of doing it yourself; but this service comes at a price.
As a general rule of thumb, unsecured loan agreements are easier to create than secured loan agreements. If you'd like to prepare your contract yourself, an online legal template will simplify the process and help ensure you've included all the right information.
Writing an unsecured loan agreement
It's possible for an unsecured loan agreement to be a relatively simple document, as long as you've got an understanding of all the necessary things that must be included to make sure it's a legally binding contract. Before writing up the document, the parties should sit down to discuss how much money the borrower wishes to borrow and how and when the lender would like it repaid.
The unsecured loan agreement should then be drafted up, covering all aspects of the contractual arrangement. The terms should be written up in easy-to-understand language and laid out in clear sections. You can find a free unsecured loan agreement template above to assist with the structure and understanding what needs to be included in your document.Back to top
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