How to Write a Personal Loan Agreement

Miranda Marquit has 10+ years of experience covering financial markets for various publications. She is the Co-host of Money Tree Investing.

Ward Williams is an Editor focused on student loans and other financial products and services. He has five years of professional editing, proofreading, and writing experience. Ward regularly contributes to stories about government policy and company profiles. He received his B.A. in English from North Carolina State University and his M.S. in publishing from New York University.

A personal loan agreement is usually a good idea whether you're lending money to family or friends or borrowing from them. It's a way for you to ensure that both parties understand the loan's terms.

Additionally, a personal loan agreement document can be enforced in court if something goes wrong, such as the borrower failing to make payments. Here's what you need to know about writing a personal loan agreement.

Key Takeaways

• A personal loan agreement document provides the borrower and lender with a way to review terms and expectations.
• Personal loan agreements are used when individuals loan money, not when banks loan money.
• Your personal loan agreement should include identifying information for all parties, clear terms (including the interest rate), and a repayment schedule.
• Personal loan agreements are enforceable by courts.

What Is a Personal Loan Agreement?

Personal loan agreements, sometimes called personal loan contracts, are designed as legally binding documents to outline the repayment terms of a loan, which helps the borrower and lender understand expectations.

A personal loan contract can also stipulate whether the arrangement includes collateral. While most personal loans are unsecured (i.e., there's no valuable asset used to secure the loan), it's possible for these arrangements to have some collateral. A secured personal loan contract should include the situations in which a lender could claim the valuable item used to offset the risk of making the loan.

Most personal loan agreement documents include information about the borrower and lender, loan amount, interest rate, fees, repayment terms and schedule, how disputes are settled, and what type of collateral (if applicable) will secure the loan.

Note

Personal loan documents are considered enforceable in court, so a borrower who doesn't meet their obligations could have a judgment levied against them, such as a lien or wage garnishment.

What Should Be Included in a Personal Loan Agreement?

You typically utilize a prearranged contract when signing a personal loan contract with a traditional lender. If you're lending to or borrowing from friends and family, you might need to write your own personal loan agreement document.

If there's only a small amount involved, a simple promissory note might be sufficient. However, in some cases, you may need a more complicated contract. Here are some of the items that should be included when creating a personal loan contract:

• Identification: Those involved in the contract should share their full names and addresses. Driver's licenses and Social Security numbers (SSN) might also be used for further identity verification.
• Date: Dates for signatures, the time the agreement goes into effect, and other important dates should be identified in the personal loan agreement document.
• Loan amount: Include the total amount being borrowed. This is the principal of the loan.
• Collateral: If applicable, include what is being used to secure the loan, its value, and the conditions under which a lender can claim the property.
• Interest rate: The stated interest rate of the loan should be included, and designate whether it's a fixed rate or variable rate. Variable rates should include the provisions for determining a new rate and how often the rate changes. If you're charging any fees (such as origination fees), you also need the annual percentage rate (APR), which includes the interest value of the fees.
• Repayment schedule: Using the interest calculation, it's possible to work out a repayment schedule. Often repayment happens monthly, but your agreement can include other arrangements. Make sure the date of the last payment is clear.
• Penalties: Any personal loan contract should include penalties for late payments, in addition to the consequences of default.
• Jurisdiction: State where the agreement will be enforceable. Double-check state laws, as well as mediation requirements, when choosing a jurisdiction.
• Severability clause: This portion of the personal loan agreement is designed to ensure that most of the rest of the agreement remains intact, even if one part of the contract is found illegal or unenforceable.
• Entire agreement clause: Many contracts, including personal loan agreement documents, feature a section detailing that any other arrangements outside of what's documented in the contract aren't part of the agreement.
• Signatures: Finally, don't forget to have the borrower and lender each sign the document.

While not necessary, it might make sense to have others witness the signatures (and sign as well) or to get the services of a notary to officiate over the signing.

Other Clauses You May Find in Business or Bank Loans

While many personal loan documents are quite simple, some can become more complicated thanks to additional clauses that are often included in business or bank loans. Some items you might see include:

• Successors: This clause explains what happens if one of the parties passes away before the agreement is fulfilled.
• Legal expenses: This specifies who's responsible for paying different legal fees depending on the various outcomes of a dispute.
• Modification: You may want to include some steps the parties might take if they want to alter the agreement.
• Credit verification: Signing the agreement typically grants permission for the lender to request documentation designed to help verify your income. You might also see a clause granting the lender permission to review your credit history.
  

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

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.

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.

Frequently Asked Questions (FAQs)

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.