How to Write a Personal Loan Agreement

A step-by-step guide for lenders and borrowers

A personal loan agreement is a legally binding contract between a lender and borrower that specifies the terms of a loan. While a personal loan agreement sets repayment terms between a financial institution and borrowers, this type of agreement can also occur between family members and friends.

The main advantage of a personal loan agreement is that it protects borrowers and lenders to avoid any misunderstanding as it clarifies repayment and other terms.

Key Takeaways

A personal loan agreement outlines repayment terms between the lender and the borrower.
Information included on personal loan agreements include the names of both parties, the date of the agreement, the principal loan amount, the interest rate, and repayment terms.
Personal loan agreements can be used as evidence in court if you fail to make payments.

What Is a Personal Loan Agreement?

A personal loan agreement provides protection for both the lender and borrower by stating their rights and responsibilities. The purpose is to ensure both parties understand their obligations and provide legal recourse in case of disputes.

This document, also called a personal loan contract, can also indicate whether the loan is unsecured or secured. If a borrower fails to pay back the loan, this document can be brought to court as evidence. Though not required, a notary may be used to certify the authenticity of the agreement.

Note

A personal secured loan is a type of loan where the borrower pledges an asset as security for a loan. In contrast, an unsecured loan is one without any collateral tied to it.

What’s in a Personal Loan Agreement?

While some personal loan agreements that involve a small amount of money only require a master promissory note, more complicated contracts may include elements such as:

Identifications: The contract will need to list the names of all those involved and their addresses.
Dates: There will need to be dates for when the contract goes into effect and any other important dates.
Loan amount: This is the principal amount the borrower agrees to take out.
Collateral: If relevant, this is the asset being used to secure the loan.
Interest rate: The personal loan agreement outlines the cost of borrowing money. The interest rate may be fixed or variable. If there are any fees, such as origination fees, the agreement may include these as an annual percentage rate (APR), which incorporates both interest and fees.
Repayment schedule: This plan can outline when and how much the borrower needs to repay the loan.
Penalties: Personal loan agreements may outline the consequence of not paying your loans on time, including what happens when you default.
Jurisdiction: This refers to the area where the court’s decision can apply.
Severability clause: This clause ensures that even if one portion of the agreement is illegal, invalid, or unenforceable, the rest of the contract will be legal.

Entire agreement clause: Also known as merger or integration clause, the entire agreement clause section defines the scope of the agreement. It essentially states that what’s included in this clause is final and nothing outside the contract applies.
Signature: Both the lender and borrower must sign the personal loan agreement to seal the deal.

Other Clauses You May Find in Business Loans

Even though personal loan agreements may seem fairly simple, if the agreements are related to business loans, you may see an added layer of complexity. Here are a few additional terms you may see in a business loan agreement:

Successors and Assigns: This section defines what happens after one of the parties changes, such as if someone passes away before the contract terms are fulfilled.
Lender’s general provisions: This part of the loan agreement includes the lender’s ability to bid on the collateral if payments aren’t met, release the borrower from the loan agreements, or tweak the terms of the collateral, among other details.
Lender’s rights if there’s a default: This portion of the loan agreement allows the lender to seize the remaining portion of the loan, take possession of any collateral, file a suit and obtain judgement against the borrower. It also allows lenders to sell or lease the collateral without public advertisement.

Example of a Personal Loan Agreement

While you can write a personal loan agreement yourself, you may consider many available templates online with the necessary clauses. You may consider having your loan reviewed or drafted by a reputable lawyer for more complicated loan agreements.

Here’s an example from the Securities and Exchange Commission (SEC) of what you may see in a personal loan agreement.

Parties. This LOAN AGREEMENT AND PROMISSORY NOTE (the “Note”) is made on this [Insert (date) of (month), (year), by and among [lender’s name] (hereinafter, known as “LENDER”) and [borrower], a Corporation organized under the laws of the State of Nevada (hereinafter, known as “BORROWER”). BORROWER and LENDER shall collectively be known herein as “the Parties.” In determining the rights and duties of the Parties under this Loan Agreement, the entire document must be read as whole.

PROMISSORY NOTE

FOR VALUE RECEIVED, BORROWER promises to repay to the order of LENDER, the sum of [Insert amount here $X] dollars together with interest thereon at a rate of [Insert Interest rate] percent (%) per annum.

ADDITIONAL LOAN TERMS

The BORROWER and LENDER, hereby further set forth their rights and obligations to one another under this Loan Agreement and Promissory Note and agree to be legal bound as follows:

A. Principal Loan Amount [Insert Principal Loan Amount]

B. Loan Repayment Terms.

BORROWER will make payment(s) to LENDER in three (3) separate payments according to the following schedule:

[Insert first installment amount] on or before [Insert month, date, year]
[Insert second installment amount] on or before [Insert month, date, year]
[Insert third installment amount] on or before [Insert month, date, year]
[Insert fourth installment amount] on or before [Insert month, date, year]
[Insert fifth installment amount] on or before [Insert month, date, year]

Final interest payment to be calculated as of final payment and due immediately thereto.

C. Collateral.

As collateral for repayment of Loan Amount, BORROWER agrees to put forth a total of 250,000 Sanguine Corp (SGUI) common shares. Lender understands that these shares are restricted under Rule 144 of the Securities Act of 1933. Upon default of any of the payments as defined in paragraph “A” above, LENDER may demand release of all “Collateral Shares” to satisfy Note.

D. Method of Loan Payment.

The BORROWER shall make all payments called for under this loan agreement by sending check or other negotiable instrument made payable to the following individual or entity at the address indicated:

[Name of Lender]

[Address and Street Name]

[City, State, ZIP Code]

If LENDER gives written notice to BORROWER that a different address shall be used for making payments under this loan agreement, BORROWER shall use the new address so given by LENDER.

E. Default.

The occurrence of any of the following events shall constitute a Default by the BORROWER of the terms of this loan agreement and promissory note:

BORROWER’S failure to pay any amount due as principal or interest on the date required under this loan agreement.

BORROWER seeks an order of relief under the Federal Bankruptcy laws.

A federal tax lien is filed against the assets of BORROWER.

F. Additional Provisions Regarding Default.

Addressee and Address to which LENDER is to give BORROWER written notice of default:

N/A

If BORROWER gives written notice to LENDER that a different address shall be used, LENDER shall use that address for giving notice of default (or any other notice called for herein) to BORROWER.

Cure of Default. Upon default, LENDER shall give BORROWER written notice of default. Mailing of written notice by LENDER to BORROWER via U.S. Postal Service Certified Mail shall constitute prima facie evidence of delivery. BORROWER shall have [X] days after receipt of written notice of default from LENDER to cure said default. In the case of default due solely to BORROWER’S failure to make timely payment as called for in this loan agreement, BORROWER may cure the default by either: (i) making full payment of any principal and accrued interest (including interest on these amounts) whose payment to LENDER is overdue under the loan agreement and, also, the late-payment penalty described below; or (ii) release collateral to LENDER as described in paragraph B “Collateral”, above.

Penalty for Late Payment. There shall also be imposed upon BORROWER a X% penalty for any late payment computed upon the amount of any principal and accrued interest whose payment to

LENDER is overdue under this loan agreement and for which LENDER has delivered a notice of default to BORROWER

Indemnification of Attorneys Fees and Out-of-Pocket Costs. Should any party materially breach this agreement, the non-breaching party shall be indemnified by the breaching party for its reasonable attorneys fees and out-of-pocket costs which in any way relate to, or were precipitated by, the breach of this agreement. The term “out-of-pocket costs”, as used herein, shall not include lost profits. A default by BORROWER which is not cured within X days after receiving a written notice of default from LENDER constitutes a material breach of this agreement by BORROWER.

G. Parties That Are Not Individuals.

If any Party to this agreement is other than an individual (i.e., a corporation, a Limited Liability Company, a Partnership, or a Trust), said Party, and the individual signing on behalf of said Party, hereby represents and warrants that all steps and actions have been taken under the entity’s governing instruments to authorize the entry into this Loan Agreement. Breach of any representation contained in this paragraph is considered a material breach of the Loan Agreement.

H. Integration.

This Agreement, including the attachments mentioned in the body as incorporated by reference, sets forth the entire agreement between the Parties with regard to the subject matter hereof. All prior agreements, representations and warranties, express or implied, oral or written, with respect to the subject matter hereof, are superseded by this agreement. This is an integrated agreement.

I. Severability.

In the event any provision of this Agreement is deemed to be void, invalid, or unenforceable, that provision shall be severed from the remainder of this Agreement so as not to cause the invalidity or unenforceability of the remainder of this Agreement. All remaining provisions of this Agreement shall then continue in full force and effect. If any provision shall be deemed invalid due to its scope or breadth, such provision shall be deemed valid to the extent of the scope and breadth permitted by law.

J. Modification.

Except as otherwise provided in this document, this agreement may be modified, superseded, or voided only upon the written and signed agreement of the Parties. Further, the physical destruction or loss of this document shall not be construed as a modification or termination of the agreement contained herein.

K. Exclusive Jurisdiction for Suit in Case of Breach.

The Parties, by entering into this agreement, submit to jurisdiction in the State of [Insert State Name] for adjudication of any disputes and/or claims between the Parties under this agreement. Furthermore, the Parties hereby agree that the courts of State of [Insert State Name] shall have exclusive jurisdiction over any disputes between the parties relative to this agreement, whether said disputes sound in contract, tort, or other areas of the law.

L. State Law.

This Agreement shall be interpreted under, and governed by, the laws of the [Insert state name].

IN WITNESS WHEREOF and acknowledging acceptance and agreement of the foregoing, BORROWER and LENDER affix their signatures hereto.

BORROWER:

LENDER

_/s/[Insert Name]____________

/s/[Insert Name]___________

[Borrower Name] [Lender Name]

Dated: Month, Date, Year

The Bottom Line

If you borrow or lend money to someone, consider writing a personal loan agreement to protect everyone involved. Even if you’re exchanging money between family and friends, a personal loan agreement ensures everyone knows what the expectations of paying back the loan are upfront. This way, there will be little to no room for misunderstanding. If you feel uncertain about the process, consider getting help from an attorney to help draft or review your agreement before all parties sign.