Loan Agreement Contracts: Everything You Need to Know
A loan agreement contract is an agreement between a borrower and a lender that can be used in court if the agreement is not met by one of the parties involved.3 min read
What is a Loan Agreement Contract?
A loan agreement contract is a written agreement between a borrower and a lender that can be used to enforce the agreement in court if the agreement is not met by one of the parties involved. In a loan agreement contract, the borrower agrees to repay the money borrowed at a future time and sometimes with interest, while the lender agrees to lend the borrower the sum agreed upon. Such agreements are used for personal, business, real estate, and student loans. They are also known as business loan agreements, personal loan agreements, and money lending agreements.
Purpose of a Loan Agreement Contract
A loan agreement contract’s main purpose is to formally set out what the involved parties are agreeing to, what their responsibilities are, and what the duration of the agreement will be. A loan agreement should meet all federal and state laws, as this will protect both sides should one not honor their end of the agreement. A loan agreement should also clearly define the purpose of the money to be lent and the amount of money lent. If the money is not used for the purpose stated, it should be repaid to the lender at once.
Consequences of Not Having a Loan Agreement Contract
If you are a lender and you do not have a loan agreement contract, you could face many problems, such as:
- The money you lent not being repaid.
- The IRS levying a gift tax as high as 40%.
- Lawyer fees if you wish to regain your money, as well as the difficulties of debt collection.
- Losing family trust or friendships, if the loan was to a family member or friend.
- Risks to your personal safety or those near you, if you have a dispute with a belligerent party.
If you are a borrower, some of the risks you could face could include:
- Unpaid bills.
- Paying for a car or house with no proof of payment.
- Paying IRS income tax for a gift.
- Paying lawyer fees to fight debt collectors or obtain a house deed, title to a car, or other proof of ownership.
- Loss of family trust or friendships, if you borrowed money from a family member or friend.
- Risks to you personal safety or those near you, if you owe money to a belligerent party.
Types of Loan Agreement Contracts
There are many types of loan agreement contracts. Some of them include:
- Business loans. These are often used for new equipment or expansion in business. A personal guarantee from the owner of the business may be necessary if the business is in bad shape or is new and untested.
- Car loans. These are used for vehicle purchases, with terms usually set at five years.
- FHA loans. These are used to purchase a home on bad credit (although it cannot be under 580). For these, the borrower must also purchase insurance in case of their default.
- Home equity loans. These are secured by the borrower’s home to guard against the funds not being paid back.
- PayDay loans. Also called a “cash advance,” these require that the borrower provide their most recent pay stub and a check from the bank account into which their employer pays them.
- Personal loans. These are loans made between family and friends. It is best to have a contract, even for these.
- Student loans. These are provided through the federal government or private firms for the purpose of paying for academic studies at an educational institution.
Basic Elements of Loan Agreement Contracts
Although there are a variety of different loans you may encounter, the basic elements detailed in most of them include:
- The borrower. This is the party receiving the lender’s money who will then have to pay back that money as per the terms of the loan.
- The lender. This is the party lending the money to the borrower who must be repaid for that money in time, often with interest, as is stated in the terms of the loan.
- The principal amount. This is the amount of money being borrowed.
- The interest. This is the money owed in addition to the principal amount, and most often a percentage of the principal amount. There are legal limits for this percentage, and exceeding them is considered usury.
- The maturity date. This is the due date for the money to be repaid.
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