How To Write a Personal Loan Agreement – Understanding how to write a personal loan agreement involves defining the terms by which an individual lends money to another person. This helps establish a legal framework that holds both parties responsible. It’s often recommended to have a personal loan agreement in place when an individual is willing to lend money to another person.
However, a personal loan agreement shares similarities with the contracts signed for personal loans from financial institutions. When it involves two individuals, the document tends to be slightly less formal. Nevertheless, a personal loan agreement is crucial for protecting both parties, serving as an essential element in the lending process, and preventing disputes.
What is a Personal Loan Agreement?
A personal loan agreement, also known as a promissory note, establishes a legally binding contract between two parties. While not always utilized, this document proves valuable when lending money to friends or family members, especially when there’s an expectation of repayment. Clearly outlining the terms, a personal loan agreement serves as a crucial tool in holding both the lender and borrower accountable. The primary reason for having such a contract is to provide clarity and accountability.
A written agreement clarifies the repayment timeline for the lender and outlines money delivery details, ensuring a smooth relationship with the borrower. However, should the borrower fail to adhere to the terms and default on the loan, the lender has legal recourse. The absence of a personal loan agreement makes legal action against a non-compliant borrower challenging for the lender. In addition, documentation is crucial for safeguarding both parties’ interests.
How To Write a Personal Loan Agreement
Financial institutions use standardized templates for personal loan agreements. If borrowing from an individual, you’ll need to create your agreement. Furthermore, hiring a lawyer for guidance is an option, but a do-it-yourself approach can be equally valid and legally binding.
After agreeing on terms, you can notarize the personal loan contract or have a third party act as a witness during the signing process. Before formalizing the contract, it’s advisable to meet and discuss fundamental loan details. This ensures a clear understanding before proceeding with formal documentation.
How Much Interest Should You Charge on a Personal Loan Agreement?
The interest rate on a personal loan depends on the borrower’s willingness to pay and the lender’s risk tolerance. Unsecured loans may have an average annual percentage rate (APR) of up to 36%, exceeding what is considered predatory lending.
Typically, individuals with lower creditworthiness face higher interest charges. For instance, if your credit score is lower, a bank or credit union might impose a higher interest rate compared to someone with good or excellent credit.
However, borrowing from friends or family could lead to a below-market interest rate or no interest charges. In contrast to some nations, the United States lacks a federal law regulating the interest rates on personal loans.
Instead, various states establish their guidelines. It is crucial to research and understand your state’s usury laws before committing to a loan agreement.
What Should be Added to a Personal Loan Agreement?
Creating a personal loan agreement can be done either by hand, using pen and paper, or by drafting it on your computer. Once the document appears satisfactory, it can be printed and signed by both parties involved.
Certainly, if you’re creating a personal loan agreement, it should include the following details:
- Legal Names and Addresses
- Full legal names and addresses of the lender and borrower.
- Names and addresses of any cosigners involved in the loan.
- Loan Details (Amount to be borrowed and date on which the loan is provided)
- Repayment Terms (repayment date, payment terms, and payment method (cash, e-transfer, etc.)).
- Interest Information
- Late payment penalties
- Collateral (details of any collateral provided as security for the loan).
- Dispute Resolution.
- Prepayment Penalties.
- Signatures and dates
Ensuring that all these elements are clearly outlined in the personal loan agreement helps establish a comprehensive and legally binding document that protects the interests of all parties involved.
Examples of Personal Loan Agreements
Creating a personal loan agreement from scratch is an option, but using templates can simplify the process. Below are examples illustrating how you might complete various sections of a template:
The lender commits to providing a loan of $10,000 CAD to the borrower, with the transaction scheduled for January 8, 2024.
The borrower agrees to fully repay the loan amount of $10,000 CAD, along with an additional interest of $1,000, making the total repayment $11,000. This payment is due on or before January 1, 2025, and can be made in cash or through a bank draft.
There are no additional charges for interest or collateral beyond the specified terms. Additionally, the borrower can make lump-sum payments without penalties, avoiding default under the agreement’s terms.
Interest on this loan agreement accrues at a rate of 4.95 percent (4.95%), compounded annually. This rate must remain equal to or below the maximum usury rate permissible in the borrower’s state.
The borrower under this loan agreement has the flexibility to repay the entire loan or make additional payments at any time without facing any penalties.
However, if the borrower chooses to make payments exceeding the agreed-upon schedule, a surcharge of the surplus amount will be applied.
Late Payment Fees
There is a late fee in this loan agreement. The borrower commits to paying the lender a late fee for the outstanding amount at the time of the missed payment.
If the borrower defaults on the payment schedule, the lender reserves the right to declare the principal amount in default. In addition, the entire outstanding amount becomes due and payable immediately.
Remember, when using templates, tailor the content to suit your specific agreement and ensure all relevant details are accurately reflected.
Writing a personal loan agreement is a prudent step, whether you’re the one lending money to family or friends or if you’re the borrower. Importantly, a well-crafted personal loan agreement can be legally enforced in court if issues arise, such as the borrower defaulting on payments.