What Is a Loan Agreement?
A Loan Agreement is a contractual agreement between the lender and the borrower containing a promise from the lender to loan an amount of money to the borrower in exchange for their promise to repay the lent money. This document regulates mutual promises made by each party. The lender may be an individual, a bank or any other credit entity. The loan contract is legally binding in either case. The primary function of this document is to serve as written evidence of the sum of the debt and the terms for repayment. The latter normally includes the rate of interest (if applicable). This note is enforceable in court, as it creates obligations on the parts of both the borrower and the lender. You may have heard of the document called a payment contract or payment agreement, which is yet another term for this note. This important document serves as a detailed statement of the loan amount and can be used as proof in court that the loan was not a gift.
You can download one of our Loan Agreement templates if you wish to lend or borrow money. There are different types of Loan Agreements, including facilities agreements, revolvers, term loans, working capital loans, and others.
Different Types of Loan Agreements
Several types of loans are accessible within one document depending on the way the loan is paid off:
- Installment Loan. The loan is paid over a set period of time, e.g. annually, monthly, or weekly;
- Lump Sum Payment. The loan plus interest (if any) is paid in one single payment due on a certain date
- Due on Demand. The loan plus interest (if any) is paid in a single payment at the lender’s request.
The Loan Agreement or Loan Contract also goes under the name of an IOU or promissory note. However, loan agreements differ from these two documents in two aspects:
- They are binding for both the borrower and the lender; and
- They are more detailed, since they include extensive provisions on the modalities of the repayment and on the penalties for non-repayment.
Loan contracts are typically used when large sums of money are involved, e.g. student loans, mortgages, car loans, or business loans. For smaller loans, as well as for informal loans (between friends or family members), promissory notes are used.
How Do I Write a Loan Agreement?
If you wish to loan money to someone and need a signed agreement, you can write a Loan Agreement. You can use it also in the event when you borrow money to show that you agree to repay. There are a few other cases when this document can come in handy, for example, when you need to prepare an amortization table if the loan includes interest or if you want to configure the monthly payment amount.
Additionally, if you have a guarantor, also known as a co-signer, you need a section on the guarantor information as well.
If there is an interest charged on the loan, you will need to detail the date when the interest will begin to accrue and whether the interest is simple or compound in nature. Another aspect of interest you have to enter in your document is whether you have a fixed or variable rate of interest. You may also wish to add a clause on prepayment or paying off the loan early.
Loan Agreements are governed by the Uniform Commercial Code (the "UCC") in the United States. Certain elements must be present in your document for it to be enforceable in the court of law:
- It must be in writing;
- It must be a promise to pay a specific amount of money;
- It must be signed by both parties.
Does a Loan Agreement Need to Be Notarized?
Although not necessarily required by your state, a notary signature adds validity to your document if it comes to be disputed in court. A notary verifies your document once all the parties have signed it, which oftentimes helps to avoid any potential legal complications.
Does a Loan Agreement Have to Be Witnessed?
Again, there is no requirement for a witness or notary public to witness the signing of the loan contract, however, it also adds validity to your document if you have an objective third party witness the signing of your agreement, which can be used as evidence in case of a dispute.