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

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

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