A loan agreement is a contract between a borrowing party and a lending party, such as a bank or other financial institution. There are many different types of loan agreements, however, they all follow a similar pattern. This agreement will protect both parties during their financial transaction, whether it is related to real estate, business, or other finances.
The loan agreement will typically have detailed information about the borrower, including their personal information, creditworthiness, income, and expenses. This information is required in order for the lender to determine if they are willing to proceed with the transaction.
The last section will detail the information about the loan, including the term for the loan, the interest rate, the total amount of the loan, and other financial specifics.
Loans are a common part of day to day finance in our society. Some are large loans provided by banks for home buying or education, while others are to consolidate student loans, or for the purchase of automobiles. The most frequently used type of loan is much smaller in size. These small or personal loans often occur between small businesses and individuals, or among family and friends. It is often said that loaning money is the fastest way to ruin a relationship; however, when you follow a sample loan agreement, you can head off many problems. When you loan any amount of money, be it two hundred dollars or two thousand, it’s important to fill out and sign a loan agreement template.
Why should you use a loan agreement template when loaning money? Because of what can happen when you don’t. When loan agreement templates aren’t followed, the lending party can lose some or all of the money owed with no certain legal remedies. Without following a sample loan agreement, you can also not enforce when the loan is to be repaid; in fact, you could find yourself waiting for years for repayment.
In legal cases involving loans without loan agreements, the court has to try to determine who is telling the truth about the terms of a loan, or even if a loan occurred. Even if you are lending to family or a friend you are certain would never cheat you, it is important to complete a loan agreement template. This loan agreement can work to not only protect your loan, but also the integrity of your relationship.
Also, it tidies up the loan by setting out payment requirements. Is the loan to be paid back in installments, or all by a certain date? Is there any interest being charged on the loan, or late charges if the loan is not paid back?
While these may not be things that lenders want to consider when loaning to someone they trust, it is important to protect both parties when lending money. If the person borrowing the money will not be able to pay it back for several months, they might feel more comfortable with the protection of a loan agreement template that states that prior to the exchange of funds. Filling out and signing a loan agreement template takes very little time and effort, but can prevent many legal and personal problems later on.
Here is our guide to loan agreements. There are many different types of loans for many different situations. We begin here by looking at loans between friends and family. We cover what to consider before entering into such an agreement, as well as how to make sure both parties are protected. From there, we cover important things to know about several different loan agreements, including home loans and small business loans. We end by discussing your options for amending or restructuring bank loans.
Loan agreements prevent lenders from being cheated while clearly explaining loan terms to protect all involved parties. A well-crafted loan agreement should clearly define all components of a loan. You want to make sure the language you use prevents any possible misunderstandings. Loan agreements should make clear that a loan is not a gift. They should, therefore, detail payment requirements--frequency of installments, full repayment date, late charges, etc.
Each of these agreements involves the lending and repayment of a sum of money. That said, while similar in many ways, there are important differences between each of these. Here’s a rundown:
They can also include joint and several liability--which holds all borrowers responsible if a single party does not repay the loan--and a right to transfer if the lender wants to transfer the loan to someone else.
The options outlined above provide lenders with varying degrees of formality when lending money. Therefore, choosing the right lending agreement for a loan arrangement will help protect you as a lender, while also, hopefully, preserving business and personal relationships.
Lending money to friends or family can be challenging. On one hand, you want to help those close to you in times of financial need. On the other hand, you want to make sure you are not taken advantage of and that your loan is repaid.
It is important to keep in mind that if someone close to you cannot acquire a personal loan from a bank, this borrower is likely a greater credit risk.
Here are three common scenarios when friends or family may ask to borrow money:
Things to consider before loaning money to family and friends:
Just because you can lend family or friends money, does not mean you should. Here’s a list of considerations to help you decide whether or not it is a good idea to lend to loved ones.
Pros and Cons of Family Loans
How to be smart when lending money
If you do elect to loan friends and family money, it is important you do so in a responsible way. Here are our tips on how to do so:
If the borrower is unlikely to be able to repay the loan under its current terms, the lender may modify the agreement to ensure repayment. The modification can reduce the interest rate on the loan, extend the loan term length, or change the type of loan (or a combination of all three).
A loan modification is a long-term solution, not a short-term solution related to a short-term financial hardship.
Home loan agreements are typically very long (around 50 pages), so it is important to know what to look out for in case there is anything suspicious in your agreement.
There are several common home loan clauses that are legally dubious, at best. They include:
Small business loans come with their own unique considerations. The most important include:
Loans can be complicated and long. It is tempting, therefore, to merely skim the agreement information. While we recommend you carefully read the entire loan agreement, be sure to pay careful attention to the following sections:
There are both good and bad ways to approach a bank with a request to restructure a loan. The key to giving yourself the best chance of convincing your bank to restructure your loan is to focus on things a bank may be willing to renegotiate. These include:
And here are things banks generally are NOT willing to renegotiate:
Loan agreements are complicated arrangements that require substantial financial literacy. In the case of loans between loved ones, loan agreements also require the navigation of complex personal dynamics. Whether you are considering loaning money to a friend or family member, ensuring you fully comprehend a home loan agreement, or are looking to modify a bank loan, we hope this guide provides you a greater understanding of loan agreements.