When you lend money to your friend or you borrow money from them, a personal loan agreement is a good idea. This personal loan agreement is a way to ensure that both parties (a lender and a borrower) understand the terms of the loan. A personal loan agreement is like the agreement or contract you would sign when you get a personal loan from a bank or other financial institution. However, an agreement which is only made between two people is typically less formal. Nonetheless, a personal loan agreement can protect both parties in case of mistakes or disputes. Therefore, if you want to lend your money to your friend, you should make such an agreement. Well, in this article, we will explain how to make a loan agreement between friends.
What is a Personal Loan Agreement?
A personal loan agreement is a contract between two parties (the borrower and the lender). Sometimes, a personal loan agreement is also called a personal loan contract or a promissory note. Although not always used, a personal loan agreement is very useful when you lend money to your friends or family members. That is because the personal loan agreement outlines the terms of the loan repayment clearly and legally. With a personal loan agreement, you do not have to guess when the debt will be repaid. The terms of the loan are clearly defined. So, you as a borrower will not have any questions about how or when your money will be paid back. In essence, this personal loan agreement can protect the lender or the borrower in the event of a mistake or dispute.
Typically, a personal loan agreement includes some information about the borrower and lender, the amount of money borrowed, the interest rate of the loan, the cost of the loan, the repayment terms and schedule, and the type of collateral to secure the loan (if applicable). Yes, the personal loan agreement may specify whether or not the loan includes collateral. While most personal loans usually do not have any collateral or assets used to secure the loan, however, if required, you can set up this personal loan agreement to include some collateral. As long as the repayment schedule is adhered to, you and your friend who borrowed the money need not worry about your friendship relationship. However, if the terms of the loan start not being met, and your friend defaults on the loan, then you can take legal action. This is the reason why a personal loan agreement is so important. Without this personal loan agreement in place, it will likely be difficult for you to take legal action against your friend who breaks their promise.
Also Read: How to Write Dollars and Cents on a Check
How to Make a Loan Agreement Between Friends?
To make a personal loan agreement, you can use your own handwriting or draft it on a computer. Once the personal loan agreement is created, you can print it. Then, the personal loan agreement is signed by both parties. Alternatively, if you want things to be more formal, or if your friend’s situation is a bit complicated, you can hire a lawyer to draft a personal loan agreement. Remember that a personal loan agreement is legally binding, whether you do it yourself or hire a lawyer. Before signing the personal loan agreement, make sure that you and your friend (the borrower) should carefully examine and review the agreement.
If you are lending money to a friend, you should write a personal loan agreement. A simple formatted personal loan agreement may be enough, if only a small amount is involved. However, in some cases, you may need the details or terms of a more complete and complicated personal loan agreement.
Here is information that should be included in a personal loan agreement:
- Full names and addresses of the borrower and the lender. For further identity verification, Social Security number (SSN) and Driver’s License can also be used.
- Loan amount. List the total amount of money borrowed. Note that this is the principal of the loan.
- Date of signing the personal loan agreement (the time when the agreement is valid).
- The interest rate of the loan (if applicable). Also, specify whether it is a fixed rate or a variable rate.
- The annual interest rate that will be charged on the loan (if applicable).
- Loan fees. If you charge an initial fee, an Annual Percentage Rate (APR) that includes the interest value of the fee is required.
- Payment terms (installment with dates or lump sum payment). If the borrower wants to pay the loan in installments, you can set up a payment schedule, e.g. payments are made monthly. Make sure the payment date is agreed between both parties.
- Payment method. The lender and borrower can discuss to determine the method of loan payment such as cash, transfer etc.
- What type of collateral to secure the loan (If applicable). You can list what collateral is used to secure the loan. Do not forget to write the terms under which you can claim the collateral in case of default.
- Penalties for late payment. Remember that any personal loan contract should include penalties for late payment, in addition to the consequences of default.
- Information on how to resolve disputes (if applicable).
- Early repayment penalties (if applicable).
- Signatures of all parties involved in the loan, including the date.
- Signatures of witnesses representing both parties involved in the loan, (if applicable).
Example of a Personal Loan Agreement
If you are not sure how to create a personal loan agreement, you can search the internet for personal loan agreement templates to make it easier for you to make a personal loan agreement document.
Here is an example:
A Personal Loan Agreement
This Personal Loan Agreement is dated August 7, 2024.
This is a Personal Loan Agreement between:
Samantha Greene of 666 Biggs St., Markham, Ontario, X1Y 2Z4 (the Borrower)
AND
Ryanna Rose of 123 Wedge St., Stouffville, Ontario, A7B 8C6 (the Lender)
Loan Amount
The amount of money lent by the Lender to the borrower is $10,000.
Payment Method
This personal loan will be due and payable through the method below:
- Monthly installments of $188 beginning on September 7, 2024. It will be continuing every month until the entire balance is paid in full by the borrower.
Interest
This personal loan bears interest of 4,95% calculated annually.
Late fee
In this personal loan, there is a late fee. If the borrower does not make a payment within seven days of the contractual due date, then, under this provision, the borrower must pay a late fee of 3% of the amount due at the time of late payment.
Prepayment
A borrower can repay the loan in full or make early repayment at any time without incurring penalties.
Default
If the borrower defaults on the payment schedule, then under this personal loan agreement, the lender may declare the principal amount under this agreement in default. At that time, the full amount is due and payable immediately
Costs/Legal Expenses
If the payment is not paid when due, then the borrower must pay a sum of money in addition to the principal loan and interest, attorney’s fees, or other costs.
Governing Law
This Personal Loan Agreement has been constructed in accordance with the laws of Ontario.
Amendments
This Personal Loan Agreement may be changed or modified if agreed in writing by the lender and the borrower.
Entire Agreement
(This Personal Loan Agreement constitutes the entire agreement between the lender and the borrower. There are no further items or provisions, verbal or otherwise, that are part of this Personal Loan Agreement. In witness whereof, the parties are to sign below on August 7, 2024).
Signed, _______________ Samantha Greene (Borrower), August 7, 2024.
Signed, _______________ Ryanna Rose (Lender), August 7, 2024.
Signed, _______________ Camilla Audrey (Witness), August 7, 2024.
Conclusion
A personal loan agreement is a legally binding contract between two parties (the borrower and the lender). If you are borrowing or lending money to your friend or family member, then you should draw up a Personal Loan Agreement. A personal loan agreement details a lot of information related to the loan, such as the names and addresses of the borrower and lender, the amount of the loan, the interest rate, the method of repayment, loan fees, penalties for late payment, and more. In addition, A Personal Loan Agreement can also protect both parties in case of mistakes or disputes.
