How to Write a Personal Loan Agreement

A personal loan agreement serves as a crucial document, especially in informal lending or borrowing situations with family or friends. Here’s a breakdown of what you need to know about drafting one:

Understanding Personal Loan Agreements:

  • These agreements outline the repayment terms between individuals, ensuring both parties understand their obligations.
  • They cover essential aspects such as loan amount, interest rate, repayment schedule, and any collateral involved.
  • Personal loan agreements are legally binding and enforceable in court, providing protection in case of disputes or defaults.

Key Components of a Personal Loan Agreement:

  1. Identification: Full names, addresses, and identification details of all parties involved.
  2. Date: Clearly specify the effective date and important deadlines within the agreement.
  3. Loan Details: Include the principal amount borrowed and any collateral offered.
  4. Interest Rate: State whether it’s a fixed or variable rate and mention any applicable fees.
  5. Repayment Schedule: Outline the repayment plan, including frequency and due dates.
  6. Penalties: Specify consequences for late payments or defaults.
  7. Jurisdiction: Indicate the state where the agreement is enforceable.
  8. Additional Clauses: Consider including clauses related to successors, legal expenses, modifications, and credit verification.

Example of a Personal Loan Agreement:

  • Utilize templates or draft your own agreement, ensuring it covers all necessary elements.
  • Clearly fill in sections such as parties involved, loan amount, repayment terms, and signatures.
  • Customize clauses based on the specific terms of your agreement, ensuring clarity and legality.

Notarization and Modification:

  • While not mandatory, notarizing the agreement can add credibility and seriousness to the contract.
  • Personal loan agreements can be modified over time if all parties agree, but follow an agreed-upon process for modifications.

Interest Rates and Promissory Notes:

  • Ensure the interest rate complies with state laws and market standards.
  • Differentiate between a promissory note and a loan agreement, with the former being simpler and focusing on repayment terms.

Conclusion:

  • Having a well-drafted personal loan agreement is essential for any informal lending or borrowing arrangement, particularly with family and friends.
  • Ensure the agreement is comprehensive, legally sound, and understood by all parties involved.
  • By clarifying terms and obligations upfront, you can minimize misunderstandings and protect the interests of both the borrower and lender.

You can find personal loan agreement templates online, such as this one from the Law District:4

First page of a personal loan agreement document
Law District.
Page two of a personal loan agreement document

 

The third page of a personal loan agreement document

Example of a Personal Loan Agreement

While you can write your own agreement from scratch, there are several templates that can make it easier to create a personal loan agreement document. Here are examples of how you might fill in template sections:

1. Parties: This Personal Loan Agreement (this “Agreement”), dated as of September 19, 2023 (the “Effective Date”), is by and between Jane Doe (the “Borrower”), with the mailing address of 123 Main Street, in the City of Anytown, in the State of Delaware, and John Doe (the “Lender”), with the mailing address of 123 Any Street, in the City of Everyplace, in the State of New Jersey.

2. Loan Amount: The sum loaned by the Lender to the Borrower will be: Ten Thousand Dollars ($10,000).

3. Payment: This Loan Agreement, which covers the entirety of the principal sum and any interest accrued, will be due and payable via the method specified below:

☐Single payment: The loan, any unpaid interest, and all other charges and fees are due either: On the demand of the lender / On or before ______/_____/20____

☐Weekly installments of __________ Dollars ($________) beginning on ____/_____/20___ and continuing every 7 days until the entire balance is paid in full.

X Monthly installments of one-hundred and eighty-eight Dollars ($188) beginning on 10/19/2023 and continuing every month until the entire balance is paid in full.

☐Quarterly installments of __________Dollars ($________) beginning on the ____ day of each quarter and continuing every quarter until the entire balance is paid in full.

☐Other:__________________________________

4. Interests: (Check one of the options below)

X This Loan Agreement bears interest at a rate of 4.95 percent (4.95%) compounded annually. This must be equal to or less than the maximum usury rate in the Borrower’s State.

☐ This Loan Agreement does NOT bear interest.

5. Late fee: (Check one of the options below)

☐ There is a late fee in this Loan Agreement. If the Borrower does not make a payment within_________ days of the contractual due date. Under this provision, the Borrower agrees to pay the Lender a late fee of ________% of the amount due at the time of the missed payment.

X There is NO late fee in this Loan Agreement.

6. Prepayment: (Check one of the options below)

X The Borrower of this Loan Agreement may pay back the loan in full or make additional payments at any time without incurring a penalty.

☐ The Borrower will incur a surcharge of ________% of the amount paid in surplus to the agreed payment schedule.

7. Income Verification:

The Lender reserves the right to require an income verification to the Borrower. This Verification may include, at least, the following:

  • Pay stubs
  • Earnings statement or W-2 form identifying employee and showing amount earned period of time covered by employment.

8. Events of Acceleration:

If any of the following events occur, this will constitute an “Event of Acceleration” under this Loan Agreement:

  • The Borrower fails to pay any part of the principal or interest when it is due under the terms of this Loan Agreement; or
  • The Borrower becomes insolvent or refuses to pay any debts when they become due.

9. Acceleration: If one of the Events of Acceleration above occurs, the Lender can, at their sole and exclusive option, declare this Loan Agreement immediately due and payable.

10. Remedies: The Lender has the right to remedy any breach of this Loan Agreement. Delays or omissions in exercising the rights granted under this Agreement by the lender do NOT constitute a waiver of these rights. Additionally, no omission, waiver, or delay may invalidate any of the stated terms, nor shall they restrict the Lender from enforcing this Agreement. The Lender’s rights and remedies shall be cumulative and can be pursued singly, successively, or together at their sole discretion.

11. Subordination: The Borrower’s obligations under this Loan Agreement supersede and subordinate all other indebtedness, if any, of the Borrower, to any unrelated third-party lender.

12. Waivers: The Lender cannot be deemed to have waived any rights provided under this Loan Agreement unless they are provided in writing. This shall not, however, be construed as a future waiver of said rights or any other covered by these terms and conditions.

13. Legal Expenses: In the event any payment made under this Loan Agreement is not paid when due, the Borrower agrees to pay, in addition to the principal and interest owed, reasonable attorneys’ fees. The amount of these expenses shall NOT exceed the maximum usury rate in the State of New Jersey upon the outstanding balance owed by the Borrower under this Loan Agreement. This sum shall be added to any other reasonable expenses the Lender has incurred in exercising their rights and remedies upon default by the Borrower.

14. Governing Law: This Loan Agreement shall be governed by, and construed in accordance with, the laws of the State of New Jersey.

15. Successors: This Loan Agreement binds the Borrower and the Borrower’s successors, heirs, and assigns, however, the Lender may not assign any of their rights or delegate any of its obligations without the prior written consent of the holder of this Agreement.

16. Signatures: IN WITNESS WHEREOF, the Borrower has executed this Promissory Note as of the day and year first written above.

Lender’s Signature: Jane Doe Date: 9/19/2013

Print Name: Jane Doe

Borrower’s Signature: John Doe Date: 9/19/2013

Print Name: John Doe

The Securities and Exchange Commission (SEC) also has a template you can use to make a personal loan agreement.

 

Does a Personal Loan Agreement Need to Be Notarized?

No, notarizing a personal loan agreement isn’t usually required. However, it can help to have an “official” record of the contract to encourage both parties to take the terms seriously.

 

Can a Personal Loan Agreement Be Changed Over Time?

Yes, if all concerned parties are willing to change the agreement, it’s possible to modify the original. However, there should be an agreed-upon process to follow.

 

If I’m Lending Money, How Much Interest Can I Charge on a Personal Loan?

In general, you should charge interest in line with the prevailing market. However, you are limited only by state laws (usually the borrower’s). You can charge up to the amount allowed by state law.

 

How Is a Promissory Note Different From a Loan Agreement?

A promissory note is often considered a type of loan agreement. However, many promissory notes are much simpler than a full contract, simply stating the amount borrowed and when it should be repaid.

The Bottom Line

Anytime you borrow or loan money, consider having a loan agreement in place to protect both parties and to clarify terms, especially when lending money to family and friends. Writing a personal loan agreement document can provide all parties with information and it can reduce misunderstandings about the terms of the loan and its repayment.

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