What is a loan agreement?
A loan agreement is a written contract in which a lender advances money to a borrower and the borrower promises to repay it on set terms: how much, at what interest rate, on which dates, and what happens if payments stop. It is used for loans between friends and family, from an owner to their own company, between two businesses, or from a private investor to a small business.
Putting a loan in writing protects both sides. The lender has evidence that the money was a loan and not a gift, and the borrower has certainty about the schedule and a record of what has already been paid.
Loan agreement or promissory note?
| Loan agreement | Promissory note | |
|---|---|---|
| Who signs? | Lender and borrower | Mainly the borrower |
| Length | Longer, with obligations on both sides | Short, a promise to pay |
| Best for | Larger or business loans, collateral, guarantors, conditions | Simple personal or family loans |
For a simple IOU, the promissory note template may be enough. Use this loan agreement when you want both parties to commit to detailed terms.
Key terms explained
- Principal – the amount borrowed.
- Interest – usually a yearly percentage. Write "0%" for an interest-free loan.
- Repayment schedule – instalments (monthly, weekly, quarterly) or one lump sum, with the first payment date.
- Prepayment – whether the borrower can pay early. This template allows it without penalty.
- Late fee and default – what a missed payment costs and when the lender can treat the loan as in default.
- Acceleration – after a default, the lender can demand the whole balance at once instead of waiting for each instalment.
- Collateral and guarantor – optional extra protection: an asset the lender can claim, or a third person who promises to pay.
Interest rates and tax: check local rules
Many states and countries set a maximum interest rate for some types of loans (often called usury laws), and the limits depend on the type of lender, the type of loan and where you are. Before agreeing a rate, check what applies to you. The template includes a clause that reduces interest to the legal maximum if the agreed rate turns out to be too high, but it is better to set a lawful rate from the start.
Interest-free or very low-interest loans between family members can also have tax consequences in some countries – for example, a tax authority may treat part of the loan as a gift or assume interest was earned. If the amount is large, ask an accountant before you sign.
How to use this template
- Enter the lender's and borrower's full legal names and addresses.
- Enter the loan amount and interest rate. Work out the instalment with the loan calculator and enter it as the payment amount.
- Choose how the loan is repaid and the first payment date, and set a late fee if you want one (the late fee calculator can help).
- Switch on Collateral or Guarantor if needed. A guarantor should also sign their own written guarantee.
- Download the PDF, read it together, and have both parties sign and date it before the money is transferred.
Tips and common mistakes
- Pay by bank transfer, not cash. A bank record proves the loan was made. If cash is used, issue a cash receipt.
- Keep a payment log. Give a receipt for every repayment so there is no argument about the balance.
- Use the company's legal name when a business is the borrower, and consider asking the owner to guarantee the loan.
- Don't leave the schedule vague. "Pay me back when you can" is the most common cause of family loan disputes.
If payments stop, send a polite reminder with the payment reminder generator before escalating to a formal demand letter.
This template is general information, not legal advice. Lending, interest and tax rules vary by state and country, and some loans (for example consumer or regular lending) are regulated; ask a lawyer or accountant for significant loans.
Frequently asked questions
Is a handwritten or simple loan agreement legally binding?
Generally yes. A loan agreement signed by both parties is a contract, whether it is typed, handwritten or signed electronically, as long as the terms are clear and lawful. Notarisation is usually not required, though some people add a witness or notary for extra evidence.
What interest rate should I charge on a personal loan?
Any rate both parties agree is generally allowed, as long as it is below the legal maximum where you are. Rates and limits vary by state and country, so check local usury rules. For family loans, also check whether a very low or zero rate has tax consequences.
Can I lend money to a family member without interest?
Yes, interest-free family loans are common. In some countries large interest-free loans can have tax effects, for example being partly treated as a gift, so ask an accountant if the amount is significant.
What happens if the borrower doesn't pay?
Under this template a missed payment can lead to a late fee, and after written notice the loan is in default. The lender can then demand the whole balance, enforce any collateral or guarantee, and, if needed, go to court or small claims to recover the debt.
Should the borrower give collateral?
Collateral gives the lender an asset to claim if the loan is not repaid, so it reduces risk for larger loans. In many places a security interest must be registered to be fully effective against other creditors, so check local rules if collateral matters.
