How to Write a Personal Loan Agreement
- A personal loan agreement protects both the borrower and lender.
- Agreements should clearly define all key terms, including loan amount, interest, repayment schedule, and penalties.
- A lender can draft the agreement themselves, use a template, or hire a lawyer.
- Unclear agreements can lead to misunderstandings or disputes, or even result in the agreement being unenforceable.
A personal loan agreement is a written contract between two parties, generally a borrower and a lender. It outlines how much money is being borrowed, the repayment schedule and what should be done if there’s a dispute over paying the loan back.
If you need to borrow money from a bank or financial institution, you can expect to sign a loan agreement. However, you may also want to consider drafting a personal loan contract if you plan to borrow from (or lend to) friends or family.
How to write a personal loan agreement
While financial institutions have templates they use as a basis for personal loan agreements, you’ll have to draw up your own if you’re borrowing from another individual, even if it’s a friend or family loan.
Depending on how complicated your personal circumstances are, you may feel you need to hire a lawyer to guide you through the process. However, the do-it-yourself approach is perfectly acceptable and just as legally enforceable. Once you have both agreed on the terms, you may want to have the personal loan contract notarized or ask a third party to act as a witness during the signing.
It’s a good idea to get together before drawing up the formal contract to hammer out the basic details associated with the loan. You may also want to agree on a contingency plan in case of a worst-case scenario — this can include answers to questions such as:
- What happens if the borrower can’t keep up with principal and interest payments?
- What fees and penalties would be acceptable to both of you and when should they occur?
- What happens if the borrower becomes disabled or dies?
Should you DIY a personal loan agreement or get a lawyer?
Whether you draft the personal loan agreement yourself or hire a lawyer depends on the complexity and loan amount. For example, with a small loan, it makes sense to draft a quick personal loan agreement or grab an online template for free or a small fee.
However, for large loans, hiring a lawyer is ideal even though doing so will add to the overall loan cost. Also consider working with a lawyer if you want the agreement to include late fees, interest, or some other complex terms, or at least have it reviewed before anyone signs.
Ultimately, you want to ensure the loan agreement follows state and local laws and protects you and the borrower, especially if you want to avoid disputes or legal issues later on.
| Scenario | Consider |
|---|---|
| You’re taking out a small loan from family or friend | A DIY loan agreement template |
| You need a large loan ($10,000+) | Hiring a lawyer to oversee the process |
| The loan comes with complex terms | Getting your personal loan agreement legally reviewed before you sign |
Where to find a personal loan agreement template
While not all personal loan agreement templates may be applicable to your situation, they could guide you and ensure you haven’t forgotten important points. Here are a few sites to consider:
What should be in a personal loan contract?
A personal loan agreement should include the following information:
| What to include | Details |
|---|---|
| Borrower and lender details | Personal information about the lender and borrower, such as names, addresses and Social Security numbers |
| Co-borrower or cosigner (if applicable) | Information about the loan co-borrower or cosigner, if it’s a joint personal loan; a second person on your loan will be equally responsible for making sure the loan gets fully repaid |
| Loan amount and funding | Loan amount and the method for disbursement (lump sum, installments, etc.) |
| Loan date and repayment date | Date the loan was provided (determines when interest starts accruing and when the first payment is due) |
| Interest rate and APR | Interest rate, which impacts the total cost of borrowing, and annual percentage rate (APR), if applicable, which factors in the interest rate and other borrowing costs and fees, such as an origination fee |
| Payment terms | Payment terms, such as how and when the loan will be paid back (Allows borrowers to determine total cost of borrowing) |
| Payment method | Method of payment, such as a check, cash or digital payments |
| Payment authorization | Payment authorizations, if required, such as for automatic withdrawals from a checking account |
| Dispute resolution | Information on how potential disputes will be mediated and/or settled |
| Late payment penalties | Consequences and penalties for late payments or nonpayment |
| Loan modification terms | Options, if any, to change the terms of the loan, such as payment date, repayment date, or interest rate |
| Prepayment penalties | Penalties for paying back the loan early (also known as prepayment penalties), if applicable (these are uncommon for personal loans) |
| Signatures for borrower and lender | Signatures from both the lender and borrower, along with the date of signing – this makes the contract legally binding |
| Witness signature (optional) | Signature from a witness who was present at the signing, along with the date – these are not common but can help verify the agreement |
Common mistakes in personal loan agreements
A personal loan agreement can help protect both the borrower and lender, but mistakes can lead to misunderstandings, disputes, or income cases, making part or all of the agreement unenforceable.
Common mistakes in personal loan agreements include:
- Leaving out important loan details: People sometimes fail to include key details such as loan amount, repayment schedule, interest rate, or due date.
- Failing to clearly state penalties and consequences of late or missed payments: Late or missed payments often result in a fee, so the agreement should explain what happens if the borrower falls behind.
- Not knowing state laws or legal requirements: Laws vary by state, affecting different terms of the loan. For example, interest rates are typically capped, meaning you cannot charge more than the maximum allowed by your state laws.
- Not signing the agreement: While verbal contracts may be enforceable, if you have a written agreement, both parties are expected to sign and date it to make it legally binding.
In some cases, borrowing from a friend or family member may not be the best option. If that’s the case, consider exploring the LendingTree marketplace to find lenders that will compete for your business.
Frequently asked questions
A personal loan contract is a legally binding document regardless of whether the lender is a financial institution or another person. The consequences are the same if you default on the contract. As a borrower, if you decide to stop making payments on the loan, you could be sued by the lender or lose any asset(s) used to secure it.
While it won’t hurt to have your loan contract notarized, doing so isn’t necessary to ensure that the contract is legally binding. Often, it’s enough to have a witness sign off on the document in addition to the borrower and the lender.
Some lenders may be open to restructuring your loan terms after an agreement has been signed, especially if you can prove economic hardship. However, that is up to the discretion of the lender.
Yes, there are many family loan agreement templates available online. You can find some examples from Forms.Legal and LoanBack.
A contract for a collateral loan should clearly state what asset(s) are being used to secure the loan and include a clause on what could happen to the asset if the borrower defaults. It should also clearly outline the circumstances under which the collateral could be forfeited to the lender.
For a personal loan agreement to be enforceable, it must be documented in writing, as well as signed and dated by all parties involved. It’s also a good idea to have the document notarized or signed by a witness.
After the contract has been executed, you may choose to keep a copy in your county recorder’s office, although it’s not legally necessary. It’s sufficient for both parties to store their own copy in a safe place.
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