Whether you’re lending to a family member, friend or small business, it’s important to have a loan agreement in place when any money is being lent. This is a legally binding document, which will be agreed to and signed both by the person lending the money (known as the lender) and by the person receiving the money (the borrower).
What is the point of a loan agreement?
A loan agreement is designed to protect both the lender and the borrower. By making the terms clear, both parties know exactly what to expect in terms of when the loan needs to be repaid, what interest it may accrue, and what would happen if payments are missed. This is essential to make sure all parties know and understand their responsibilities, according to legal experts Law Depot
What should be included in the loan agreement?
A loan agreement will certainly need to include the full name and address of both parties involved in the loan, since this is a legal document.
The loan agreement should then contain all the details of the amount of money being loaned and any interest that will be incurred on the loan, if agreed by both parties. It should also include details of the length of the term of the loan.
If, as is often the case, interest is being charged on the loan, the loan agreement will contain all the details about interest rates and whether the rate can change. It should also give an illustration of the actual amounts payable at the end of the term, to ensure complete transparency for the borrower.
It will also specify how and when repayments are to be made, whether the borrower is permitted to repay the loan early, and what might happen in the event that the borrower misses a repayment. If any collateral has been agreed, details of this should be specified, too.
In the event that the loan is being offered by a business, the loan agreement should also include details of any previous loans and how much remains outstanding.
