ACROBAT FOR BUSINESS | 8-MINUTE READ
How to write a loan agreement with clear lending terms.
Learn what to include in your business and personal loan agreements.
A loan agreement includes the total value of the money lent, any terms for repayment, and what happens in the event of a default.
Loan agreements can be used for a variety of purposes, including borrowing for personal assets or business needs. Discover more about these important documents and how to create them.
What is a loan agreement?
A loan agreement or loan contract is a written agreement that specifies all the details of a personal or business loan, including the amount of money or the assets being lent, the repayment terms, and what happens if the borrower defaults (is unable to pay according to the terms). Loan agreements should be used even when lending money to a friend or family member. Unlike a casual IOU, a formal contract makes every detail clear for both parties, can be legally binding, and can help prevent disputes.
How to write a loan agreement contract.
When you write a contract or an agreement for a loan, you set expectations with the other party, leaving nothing for interpretation. The document serves as legal proof that money was borrowed, a plan has been created for returning it, and specifies what happens if the plan isn’t followed. Here’s a breakdown of how to draft a loan agreement.
Agree to terms.
First, negotiate terms with the other party. Once you’ve agreed, note all terms and conditions.
Create a draft for everyone to review.
Fill out a loan agreement template with all of the agreed-upon terms and information. Clearly outline all of the terms, and make sure that nothing is left open to interpretation. Mention any grace period for late payments and the consequences of default.
Make adjustments if needed.
Send the draft to the other party for review. If you are having the document reviewed by an attorney, send them a copy as well. Make changes if needed.
Add signatures (and notarization).
Sign the document, and send the document to the other party for a signature. Consider having the agreement notarized, even if it's not mandatory to do so in your state.
Distribute copies of the executed agreement.
Lastly, forward everyone an executed copy of the agreement. Retain a signed and notarized copy for your records.
Common items in a personal loan agreement.
While your personal loan agreement may differ depending on your exact needs, several elements will typically be present in most examples:
- The loan amount, also known as the principal amount
- The date of the creation of the loan agreement
- The name, address, and contact information of the borrower
- The lender’s name, address, and contact information
- A plan for loan payment, such as a monthly payment plan with start dates and due dates
- The maturity date or the date that the final payment is due on the loan
- The interest rate of the loan and how payments will be applied
- Prepayment details that specify if and how the borrower may make additional payments or pay back the loan in one lump sum
- Consequences if the borrower fails to make payments or in the event of default, which may also include penalties such as late fees for late payments
- Details about guarantors who promise to repay the loan should the borrower fail to pay or successors who will be responsible for the loan in case the borrower passes away
- An “in witness whereof” section for signatures and dates of signatures from the borrower, the lender, and one or two witnesses
More detailed clauses you may find in business loan agreements or bank loans.
More complex loans, like mortgage notes, may include additional clauses such as the following:
- Fluctuation of interest. This clause gives banks permission to change interest rates based on base-rate fluctuations.
- Force majeure. This clause gives the lender permission to alter interest rates based on extraordinary economic circumstances.
- Security cover. For secured loans, this clause outlines assets that are being offered as security for the loan amount. For home loans, the security is the property being bought.
- Default definition. This clause states what qualifies the loan as being in default, which is often defined as when the borrower has missed a certain number of payments.
- Disbursement. This clause clarifies exactly where the borrowed money will be sent.
- Reset. This clause defines if and when interest rates will be revisited and reset.
- Other balances offset. Also known as a balance set-off, this clause outlines how payments will be offset by other balances owed between the parties.
- Third-party repayment collection. This clause claims the lender’s right to hire third parties to collect payments.
- Amendment. This clause gives the lender the right to amend any clause without informing the borrower (a cause for particular caution on the part of the borrower).
- Notification. This clause specifies life events that the borrower must inform the lender about, such as a change in income or residential address.
- Severability. This clause proclaims that should one provision of the agreement be deemed void or unenforceable, it will not affect the validity of the other provisions of the loan.
Loan agreement sample.
This Loan Agreement (“Agreement”) is made and entered into as of [Date], by and between:
Lender: [Lender’s Name] with an address at [Lender’s Address] (“Lender”)
Borrower: [Borrower’s Name], with an address at [Borrower’s Address] (“Borrower”)
- Loan amount and terms. The lender agrees to loan the principal sum of [loan amount] USD (the “Loan”). The loan shall be repaid in full, including any accrued interest, by [repayment date].
- Interest rate. The loan will bear interest at the rate of [interest rate]% per annum, calculated on the outstanding principal amount from the date of this agreement until the loan is repaid in full.
- Repayment. Borrower agrees to repay the loan in monthly installments of [installment amount] USD, due on the [due date] of each month from [first payment date] until [repayment date].
- Prepayment. The borrower may prepay the loan in full or in part at any time without penalty. Any prepayment will first be applied to any accrued interest and then to the principal amount.
- Default. If a borrower fails to make any payment when due, the lender may declare the entire remaining principal amount, along with any accrued interest, immediately due and payable. Borrower agrees to pay all costs and expenses, including reasonable attorney fees, incurred by the lender in the enforcement of this agreement.
- Governing law. This agreement shall be governed by and construed in accordance with the laws of the state of [state].
- Amendments. This agreement may not be amended or modified except in writing and signed by both parties.
- Signatures. To make things official, the borrower and lender must sign the loan agreement.
Loan agreement FAQs.
You will most likely have a lot of questions about drafting your own loan agreement. Here are a few common questions and explanations to help you navigate this process and avoid making any major errors.
How is a promissory note different from a loan agreement?
Loan agreements and promissory notes are very similar types of contracts. They both provide details about a debt that a borrower promises to repay. However, a loan agreement likely contains longer and more detailed clauses and is signed by both the borrower and the lender, while promissory notes are sometimes only signed by the borrower.
What can you use a loan agreement for?
You can use a loan agreement for a variety of lending scenarios. Want to lend money to a friend or family member? Create one of these binding documents.
You can also use this form to take out a loan from an investor or financial institution. All versions of the document will include some of the same basic information, including the terms, how much you are borrowing, and the interest rate.
Loan agreements also outline any early payment penalties or other special conditions that could impact how much you owe. Using this document helps ensure both parties understand their obligations while also protecting your interests.
Are loan agreements binding?
Loan agreements are binding contracts. You are obligated to adhere to its terms and conditions once everyone signs the document. The other party can pursue legal action to enforce the agreements if you fail to uphold your end.
The enforceability of loan agreements allows you to protect your interests. However, you will face repercussions if you are the party who violates the agreed terms and conditions.
Ask a trusted legal professional to review any contract or other binding form before signing so you fully understand the repercussions of a breach or attempt to cancel.
Do loan agreements need to be notarized?
Although a notary may not be required in most cases, notarizing your document can provide an extra layer of security and demonstrate the authenticity of the form. A notarized document confirms the identities of you and the other party while also conveying that both of you entered into the agreement voluntarily.
Check your local and state laws and the lending institution’s policies to find out whether your document needs to be notarized. Going the extra mile can be useful in preventing fraud or other disputes. It also makes the agreement easier to enforce should the other party fail to honor their side of the contract.
Can I cancel a loan agreement?
Yes, but that doesn’t mean you are free from all of your responsibilities. You’ll also need the other party’s consent in most cases. The original document should outline the conditions under which you are allowed to cancel and any penalties you’ll face for doing so.
Never cancel an agreement verbally. Draft a formal document to record the termination, including who initiated the process, why, and what repercussions either party incurred, if any.
If the other party won’t let you cancel the agreement, you might find yourself in a tight spot that requires legal action or a settlement of some sort. Taking legal action does not guarantee that the agreement will end favorably, so think carefully before you try to get out of an agreement.
Create, send out, or e-sign loan agreements digitally.
E-signatures are binding, and going digital makes it easier than ever to create and sign legal documents like loan agreements. That’s why in a 2020 Forrester Consulting study, 72% of respondents in financial services firms said they consider digital document processes essential to their business.
Adobe Acrobat for business lets you:
- Create a loan agreement template to use again and again
- Easily send your agreements for e-signature
- Fill out and sign agreements online
- Use document tracking and set automatic reminders for signatures
- Set expiration dates for signature requests
Cut costs with e-signatures.
Financial businesses are making processes easier for themselves and their borrowers by going paperless. Sony Bank is using e-signatures to dramatically reduce the time spent finishing mortgage loan contracts. Work that used to take the company two to three weeks now takes as little as one hour, and they’ve cut operational costs by 10%.
Make digital signing a part of your loan agreement process.
With Acrobat for business, signing necessary loan contracts is smooth sailing. Of course, always get legal advice before creating or signing a loan agreement. As a borrower, be sure to read the entire agreement with your legal counsel before signing.
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How to write a loan agreement with clear lending terms.
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