Simple Loan Agreement

What is a loan agreement?

A loan agreement is a written contract between a lender and a borrower that sets out the terms on which money is being lent. It records the loan amount, when and how it must be repaid, whether interest applies, and what happens if repayment is late or missed.

This loan agreement template UK can be used for the following:

• family loans between members of a family or friends;
• business loans;
• car loans; or
• any other types of loan used for daily situations.

This document template is suitable for usage across England and Wales.

What should be included in this loan agreement document template?

A standard loan agreement template UK shall cover a number of important clauses, including:

• Details of the Parties. The text of the loan agreement template should outline full identification details of a borrower and a lender, including their name and address.
• Loan amount. A standard loan agreement should outline the total amount of the loan in British pounds.
• Purpose of the loan. If the lender wants, they may limit usage of borrowed money to specific purposes only. For example, to pay for a vacation, purchase a car, make a house renovation, and so on. If this is the case, the exact list of purposes should be outlined directly in the document.
• Repayment Schedule. These are key dates which the borrower shall follow to repay the loan on time. The repayment of the loan is possible on the lender’s demand, on a specific date or according to the agreed schedule.
• Interest. There is not a statutory set interest rate. For a family loan or loan between individuals, the average interest rate is between 5 and 8% per annum. For business loans the interest rate usually varies between 5 and 12% per annum.
• Events of default. This is the list of circumstances in which the full loan amount must be repaid immediately. There is a list of statutory default events that may trigger early repayment, including bankruptcy of a borrower, failure to use the loan for a specific purpose, etc.

Types of loan agreements in the UK

Depending on the type of a loan agreement document template, the parties of the future arrangement should be aware of additional rules, restrictions and important considerations as follows.

Family Loan

A family loan agreement template is used between family members and friends to lend money to each other. This is one of the most popular, and yet the most disputatious, types of contract that may significantly affect relations.

When entering a family loan agreement template, parties should think of the following:

• Repayment Schedule. The text of the document must outline the exact repayment schedule for the loan with clearly stated dates. Failure to include a repayment schedule may entail a high risk of HM Revenue & Customs (HMRC) considering this transaction as a gift, which should be further taxed.
• Interest-free loan. Most family loans are interest-free, which means that the lender earns nothing when borrowing money. However, if there is an interest rate, the lender should always report it to the HMRC as earned income, even if earned from a family loan.
• Mortgage application. If the borrowed money under the family loan agreement template is planned to be used for a mortgage application, some banks and financial institutions may not accept it. This is because an outstanding loan reduces the borrower’s net equity in the property and may affect mortgage affordability assessments. A family loan agreement for a property deposit can work but should be discussed with the borrower’s mortgage broker before the loan is made.

Business loan

Loans are a quick and helpful financial solution for your business to grow or expand. Therefore, a simple business loan agreement template is widely used between companies and directors, between companies and shareholders, and between companies on a daily basis, for example:

• Director’s loan. A director may lend their personal funds to support cash flow or fund a specific project. The company’s accountant should be consulted about the tax treatment.
• Shareholder loan. If the company’s statutory documents allow doing so, shareholders may also provide additional funding to the company without the change in their equity structure.
• Inter-company loan. A property accounting is also required when lending money between two companies within the same group.

Car Loan

A simple car loan agreement template is used to lend or borrow money to purchase a vehicle for personal, non-commercial use. If the given loan is limited to this specific purpose, in such a case, details of a vehicle should be stated in the text of the document, including:

• make and mode;
• year of manufacturing;
• mileage and condition (for pre-used vehicles).

Please note that this loan agreement document template cannot be used for commercial loans offered by dealers.

Top 4 legal considerations before signing a loan agreement

Deed Execution

If a loan agreement contract template is executed as a deed, it allows a lender to demand the payment of the unpaid loan for the period of 12 years following the default event. When, however, the loan agreement is signed as a simple contract, the lender can only enjoy a statutory period of 6 years.

Therefore, this is something a lender should consider carefully, as once the document is signed, it cannot be re-executed as a deed further.

No gift

To prevent any further disputes with HMRC, make sure the wording of your family or business loan agreement template clearly outlines that this is a lending arrangement and not a gift. To improve clarity, you can add a separate clause stating, “Nothing in this agreement should be considered as a gift or donation for charitable purposes.”

Application of interest

An interest-free loan is simpler and carries no income tax obligations for the lender. However, if you expect to generate some income, perhaps it is worth including an interest rate clause defining the amount of an interest rate per annum that shall apply. If you do charge interest, declare it on your self-assessment tax return. Failure to do so may result in serious tax fraud, including imprisonment and huge fines.

Default interest vs penalty

If your loan agreement includes a default interest clause (applying a higher rate to overdue amounts), ensure the rate is a genuine pre-estimate of your additional costs, not a punitive figure designed to deter non-payment. Keep in mind that courts in England and Wales will not favour an excessive penalty clause when the document is signed by both parties. The safest approach is to choose a rate in between 2% and 5% per annum.

Why use FasterDraft for a loan agreement template UK?

By customising this template with FasterDraft, you get the document with the following benefits:

• a template that is specifically suitable for England and Wales;
• a template created by qualified solicitors and never generated by AI;
• a document that is created in accordance with the general principles of English contract law;
• a template with a clear structure and professional wording;
• a document that fully aligns with the Limitation Act 1980.

How to use this template?

To get a fully customisable document template, follow a few easy steps below:

1. Click the “Create Document” button.
2. Answer simple questions in the form.
3. Select a template’s format – a loan agreement template Word or PDF.
4. E-sign the document.
5. Make a payment.

The document is ready for instant download immediately after the purchase.