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What is this loan for?

Real Estate

What Is a Loan Agreement?

A Loan Agreement, also known as a promissory note, loan contract, or term loan, can be used for loans between individuals or companies.

A loan agreement is:

  • A borrower's written promise to repay a sum of money, or principal, to the lender
  • A document that outlines the terms of a loan, including a repayment plan, between a lender and a borrower
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What Situations Require a Loan Agreement?

Loan Agreements are commonly used for loans that require repayment over time, such as:

  • Commercial or business loans, such as a small business loan for
    a startup
  • Student or educational loans
  • Loans for large purchases, such as cars, furniture, or electronics
  • Private or personal loans between family members, friends, or colleagues

Should I Use a Loan Agreement or a Promissory Note?

Both are legally binding contracts, but they have a couple
of key differences:

  • A Promissory Note is used for a smaller loan with simple repayment terms, and typically only includes the borrower's signature
  • A Loan Agreement has more complex repayment terms, and includes the signature of both the borrower and the lender
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Why Do I Need a Loan Agreement?

Creating a written loan contract benefits both the borrower and lender.

For the borrower, a Loan Agreement:

  • Helps keep track of the payment schedule
  • Confirms the lender's agreement to the payment terms, such as interest rate

For the lender, a Loan Agreement:

  • Enforces the borrower's promise to pay back the loan
  • Allows recourse in case the borrower fails to make payments or defaults on the loan

How Do I Write a Loan Agreement?

Your Loan Agreement should contain the following key information:

Loan Details:

  • Loan amount
  • Interest, which is the fee a lender charges a borrower to use
    their money. It is usually expressed as a percentage of the
    principal (e.g. 7%)

Payment Schedule:

  • Term, or length, of the contract (e.g. one year)
  • Choice of a single payment or regular payments

Payment Method:

  • A one-time payment made on a specified date at the end of
    the term
  • A one-time payment made by a certain date upon demand
    from the lender
  • Regular payments made over a given period of time

Missed or Late Payments:

  • Increased interest rate if the loan isn't repaid on time
  • Collateral, which is something of monetary value, such as a
    vehicle or property, that is forfeited to the lender if the loan
    cannot be repaid

Lender and Borrower Information:

  • Contact details
  • Location
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Do I Need Another Type of Contract?

You may also find the following forms useful:

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