How to Write a Personal Loan Agreement
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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 it 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 on lending money to friends or family.
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What is a personal loan agreement?
A personal loan agreement is a legally binding contract that defines the expectations for both a borrower and a lender. It can be drawn up with an official lender, like a bank or credit union, or used in a more informal situation, such as with a friend who’s lending you an amount of money. It’s sometimes referred to as a promissory note.
In the broadest terms, a personal loan agreement includes:
- How much you’re borrowing and how payment will be delivered
- When and how you promise to pay it back
- Any fees and/or penalties you’ve agreed to pay, depending on the scenario (such as if you prepay the debt or become delinquent)
Most personal loans are unsecured loans, meaning you promise to pay back the funds based on your creditworthiness as a borrower. If you don’t pay back an unsecured loan, you may face penalties like late fees or wage garnishment. A secured loan, on the other hand, requires collateral, such as a car or home — if you don’t pay back a secured loan, you could lose your collateral. Make sure to carefully review that section in your loan agreement for more information.
What should be in a personal loan contract?
A personal loan agreement should include the following information:
- Names and addresses of the lender and the borrower
- Information about the loan co-borrower or cosigner, if it’s a joint personal loan
- Loan amount and the method for disbursement (lump sum, installments, etc.)
- Date the loan was provided
- Expected repayment date
- Interest rate and annual percentage rate (APR), if applicable
- Payment terms, such as when and how the borrower will repay the funds
- Method of payment, such as through a check or cash
- Payment authorizations if required, such as for automatic withdrawals from a checking account
- Information on how potential disputes will be mediated and/or settled
- Consequences and penalties for late payments or nonpayment
- Options, if any, to change the terms of the loan
- Penalties for paying back the loan early (also known as prepayment penalties), if applicable
- Signatures from both the lender and borrower, along with the date of signing
- Signature from a witness who was present at the signing, along with the date
How much interest should you charge on a loan agreement?
The amount of interest you can charge on a personal loan depends on two factors: how much you’re willing to pay as the borrower and how much risk the lender is willing to accept. The average APR on an unsecured loan tends to fall between 5.75% and 35.99%. Typically, anything above that amount may be considered predatory.
In general, borrowers with less creditworthiness are charged higher interest rates. For example, if you have a lower credit score, a bank or credit union will likely charge you more interest than someone with good or excellent credit. That said, if you’re borrowing money from a friend or family member, they may choose to charge you a below-market interest rate, or even forgo charging interest entirely.
Unlike some other countries, there is no federal law that governs the amount of interest that can be charged on a personal loan. However, some states will impose their own guidelines, so be sure that you do some research into your state’s usury laws before signing on the dotted line.
| Want to see how interest charges might affect your monthly payment? Use our personal loan calculator to see the impact that different loan terms could have on your bottom line. |
How to write a personal loan agreement
While financial institutions have templates on which they base their personal loan agreements, you’ll have to draw up your own if you’re borrowing from another individual.
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?
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:
Frequently asked questions
Financial institutions offering personal loans will most likely require you to sign a personal loan agreement. These can include:
- Banks
- Credit unions
- Online lenders
- Payday lenders
However, if you’re lending money to family or a close friend, it may also be a good idea to draft up a loan agreement.
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, it’s not 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.
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.