Personal Loan Agreement

What is a Personal Loan Agreement?

A loan agreement is a legal document used by one party to borrow a fixed amount of money to another party under certain conditions. This is a powerful legal tool defining the process of lending money, rights and obligations of parties involved, as well as legal consequences in case of either party’s default.

The parties to every money borrowing agreement are:

• Borrower: An individual or organization who is in need of additional financial resources.
• Lender: An individual or organization who is ready to provide to a Borrower agreed sum of money with or without interest.

Depending on a specific case, a personal loan document template may have, for instance, two borrowers and one lender or vice versa.

A personal lending agreement would be helpful in the following scenarios:

• Lending money between family members or close friends;
• Obtaining a student personal loan to start educational programs or trainings;
• Soliciting additional finance for business development and growth and many more.

Why Should You Use a Loan Agreement?

At first sight a loan agreement itself may look as a simple daily transaction between the parties. Thus, most people prefer to skip signing a basic loan agreement template and make an oral contract. While the law does not prohibit doing so, such a decision may have significant practical consequences for either of the parties in the future.

Imagine a situation when a person A (Lender) borrowed money from person B (Borrower) till the end of the current financial year. On 31st December the Borrower defaults and the Lender demands money back. The Borrower argues that the end of the financial year should be 31st January and not 31st December. As a result, the Lender decides to bring this case to the court.

Should the parties have had a written personal loan agreement document in the first place, there would be clarity regarding the repayment date. Having even a simple personal loan agreement ensures:

• Predictability: Having a written loan agreement ensures that all important terms of the loan are fixed and cannot be changed unilaterally by the borrower or lender. For example, if a loan agreement states that a due date is 1st of March, both parties have realistic expectations on when exactly the repayment should take place.
• Absence of Ambiguity: Signing a loan agreement between the parties guarantees that there are no implied provisions. For instance, if a lender plans to charge an interest rate though no interest rate is included into the loan agreement, then no interest rate should apply.
• Legal Protection: Well drafted loan agreement effectively protects either party from unfair actions of the other party. A written loan agreement is a legal proof that a certain amount of money has been borrowed.

What is the difference: Loan Agreement vs. Promissory Note?

Both promissory note and loan agreement are legal documents which are used in the process of lending money between persons. At the same time there is a number of structural and legal distinctions:

One-sided vs Two-sided Obligations

A personal loan agreement contract is legal document, where both lender and borrower have rights and obligations towards each other. For instance, a lender has the right to receive back full loan amount, though a lender cannot ask for the repayment earlier than due date.

Unlike with a loan agreement, a promissory note is a one-sided document, where a borrower undertakes to repay a loan amount in full. The text of a promissory note does not contain corresponding lender’s obligations.

While a loan agreement between the parties should be signed by lender and borrower, a promissory note should be signed by a borrower only.

Structure of Personal Loan Template

Both documents need to contain similar mandatory provisions in order to become valid, including:

• Amount of money borrowed, currency, a schedule of loan delivery (if loan will be provided in instalments);
• Applicable interest rate along with a separate schedule of interest repayment;
• Repayment terms (e.g. as a lump sum, in instalments).

However, a personal loan contract template contains more complicated structure and is widely used for more complex transactions. A good example of a personal loan agreement with more complex structure could be the following provisions:

• Inclusion of positive incentives for a borrower, who makes repayments without delay (e.g. reduce of an annual percentage rate);
• Borrower’s repayment obligation could be additionally secured by a third party (e.g. a guarantor);
• Compensation of all attorney fees by a party who makes a default and many more.

Business vs. Personal Needs

As a good rule of thumb, a promissory note is widely used while lending money between friends and family members. On the other hand, a personal loan agreement document is commonly used between businesses, with banks and third parties.

How Do You Write a Simple Personal Loan Agreement?

There are several ways how you can create your personal loan agreement:

• Ask Your Attorney for Help: The first way is to find an attorney who will create a personal loan agreement template for you. Please be aware that it is a costly option since apart from paying attorney fees you would also need to pay fees for creating a document’s template itself.
• Generate Personal Loan Contract Template: The second way is to fill in a simple questionnaire at Faster Draft, to get your personal loan agreement template Word or in PDF. It will save you lots of time and money. Faster Draft Loan Agreement template is created according to the law and could be used instantly.
• Write a Personal Loan Agreement from Scratch: We do not recommend drafting legal documents by yourself. It is better to use a sample personal loan agreement from Faster Draft or seek for attorney help.

 What are the Key Elements of a Personal Loan Agreement?

Every legal document has a set of mandatory and non-mandatory provisions. Mandatory provisions are essential elements of a legal document. Without mandatory provisions a document cannot become legally binding. A legally binding document is a document which establishes legal consequences, duties and obligations of the parties.

Mandatory elements of any business or private loan agreement template are the following:

• Parties Details: Every money lending contract template should contain full details like name and address of borrower and lender. When either of the parties is an organization, make sure to indicate full details of their authorized representative. Usually, a person authorized to sign documents on behalf of an organization is a person indicated in the company’s bylaws or power of attorney.
• Loan Amount: It is essential to state the exact amount to be borrowed. If you plan to borrow in a currency other than USD, such other currency should be stated directly in the text of the agreement. The good money lending contract template should also provide how exactly money will be delivered to the lender – cash, cheque or any other way.
• Repayment Process: Having a detailed repayment schedule is a key provision of this agreement. There are two possible ways a loan could be repaid back – as a one-time payment or in several instalments. If it is a one-time payment, the loan agreement should indicate the exact date or moment when the loan should be due and payable back. When it is a repayment in instalments, in that case the document should provide intervals in which a loan amount should be paid back. Do not forget to indicate the exact way the loan should be returned – in cash, by check etc.
• Signature Date and Parties Signatures: In order to transform a personal loan template into a legally binding document, putting parties’ signatures is important. Parties can sign the document on the same date or on different dates. The loan agreement becomes legally valid once the document is signed by both parties.

Non-mandatory elements allow to fully adjust a template for loan agreement in accordance with your very specific needs and preferences:

• Purpose of the Loan: In some cases, a lender provides a loan for specific purposes only – for instance, to finance education or to launch the new business. If you plan to deliver a loan for a specific purpose only, such a purpose should be indicated directly in the loan agreement. Failure to use a loan for agreed purposes results in a borrower’s default.
• Annual Percentage Rate: A loan agreement could be interest-free or with interest. If you plan to charge an interest, the exact interest rate should be provided in the text of the loan agreement. The repayment schedule for accrued interest is something you should not omit. An accrue interest could be repaid along with the loan amount or in accordance to a separate repayment schedule.
• Jurisdictional Clause: This clause is mostly used in business lending contract templates. It allows parties to determine well in advance which exact court will hear the case if any dispute pops up in the future.
• Positive Incentives for Borrower: The provisions of the loan agreement may encourage a borrower to repay the loan amount earlier. Amongst the possible incentives could be reduction of the interest rate or more favorable conditions for future loans.
• Division of Attorney Fees in case of a Dispute: Along the road conflicts may arise. Therefore, it is essential to discuss in advance how attorney fees to be distributed between the parties once their case is brought to the court. Usually, this is a default party who undertakes to cover all attorney expenses. Though, the lender and borrower may agree another way the costs to be split up.
• Assignment of Obligations: A good personal loan agreement example is when assignment of duties and rights under the loan agreement by one party should be consented by another party. This is especially crucial for a lender. Imagine borrowing money from one person, who seems to be financially stable, and they find out one day that their obligations have been assigned to unknown third parties.

Do Personal Loan Agreements Need To Be Notarized?

The process of signing the loan agreement is important as it may directly affect the document’s validity. The personal loan agreement should be signed by both parties. The loan agreement does not need to be notarized or certified by a notary.

Parties can put their signatures by hand using a printable loan agreement template in PDF or Word. If parties prefer to put e-signatures, they can also do so. Both ways of signing a loan agreement are acceptable and recognizable in the USA.

Please note, that if a loan is secured by a collateral, in that case a borrower would need to ensure the proper registration of collateral according to the laws of their state. Failure to register collateral does not affect in full validity of the loan agreement. The loan agreement will remain valid except for the provisions related to establishment of the collateral.

Do You Need a Witness for a Loan Agreement?

Signing the personal loan agreement does not require the presence of witnesses. If parties wish to do so, they may invite witnesses. Though it won’t add any extra layer of protection towards the loan agreement itself.

What is a Good Personal Loan Agreement Example?

There is no such a thing as good or bad loan agreement. A loan agreement template which worked well for one life scenario, may not be suitable for your personal circumstances. In fact, the law does not know the words “good” document. Instead, lawyers frequently refer to so-called good practical tips, which should be taken into consideration while creating your personal loan document template.

• Check Financial Background: Before entering into a loan agreement, it is always advisable to make a prior check of the borrower’s financial background. A lender should ask for a borrower’s previous credit history, any cases of bankruptcy and existing financial commitments. All that information may help a lender to understand if it is worth lending money or not.
• Ask for Guarantor: To secure loan repayment, a guarantee clause could also be included into the sample loan agreement template. A guarantor is a third party which undertakes to repay a loan amount once a borrower is in default. If there is a guarantee clause, a guarantor would need to sign the loan agreement as well.
• Impose additional Collateral: A Borrower could be asked to set up a collateral in order to secure the repayment obligation. Borrowers can provide cash, vehicles, real estate and securities to be used as a collateral under the loan agreement. If a borrower defaults, a collateral could be used to cover the loan amount as well as any accrued interest, if any.

Download Your Printable Loan Agreement Template

There are lots of website offering templates of loan agreements online. Before making purchase, the following things should be noted:

• Sample Only: Most of online platforms offer sample loan document for personal loan or business loan. It means that you download an empty sample of document, which might not be suitable for your specific needs and situation. Faster Draft offers 100 % customized templates of loan agreement.
• Validity in all 50 States: Faster Draft template for loan agreement could be customized in order to be used in throughout all states.
• E-Signature: You can e-sign the document on your own in order to send it further to the other party to the agreement. It makes the whole process a paperless and much quicker.
• PDF or Word: You can get your business or personal loan template Word or in PDF format.