Loan agreements are legal documents that bind borrowers to terms of loans. These documents are normally created by attorneys representing lending firms. It is, however, possible to draw up a loan agreement to use in a private loan transaction. A traditional loan agreement will include: a promissory note, loan repayment terms, default guidelines, late payment provisions and clauses regarding litigation procedures.
Negotiate the terms of the loan with the borrower (or lender, depending on who you will be in the transaction). In order to avoid problems when funding the loan, be sure to hammer out all details of the loan.
Review a sample loan agreement and notice the following general paragraphs: promissory note, principal, interest, term, payment, default, borrower, lender and witness signatures, and security. You'll need all these sections on your agreement.
Decide whether the loan is to be collateralised. This means the borrower will be offering an asset for security on the loan. In the case of default, that asset can be seized to recover the funds lost in the loan.
Draw up the loan agreement according to the pre-negotiated terms under the supervision of the attorney. Since this is a legally binding document, you'll want an attorney to review both the drawing up of the contract and the signing of the contract.
Calculate total interest on the loan using an amortisation schedule. (See Resources for a helpful and easy amortisation schedule calculator.)
Keep the language in the document simple and clear---the document does not need to be littered with legalese to hold up in court.
Confirm all the details with the borrower (or lender, if you are the borrower) once the contract is completed. Set an appointment to close and fund the loan.
As a general rule, the simpler the loan and agreement, the better.
You must be 18 or older to enter into a legally binding contractual agreement.
Tips and warnings
- As a general rule, the simpler the loan and agreement, the better.
- You must be 18 or older to enter into a legally binding contractual agreement.