A loan agreement – referred to in professional banking circles as a “facilities agreement” – is a document between two parties that outlines the terms of the loan when money is transferred from the lender to the borrower. These documents are also sometimes referred to as “revolvers,” “working capital loans,” or “term loans.”
This contract reflects the request for money, the offer of money, and the terms under which the money is lent and under which it will be paid back to the lender. These terms can include interest or not, and dates for installment payments or a date on which all the money must be repaid to the lender. Loan agreements can also lay out terms if payments are made late or not at all.
Loan agreements should be written down, even if the agreement is between friends or family members. Although oral loan agreements are considered in many states just as legally binding as written agreements, writing down your terms can make repayment much easier, especially if there is disagreement over interest or timing.
When and How is a Loan Agreement Used?
Loan agreements protect both the lender and the borrower, so writing out terms and signing the contract will be useful for all parties involved.
Financial institutions created loan agreements, although larger “loan portfolios” are used by many banks today, especially for commercial loans or large loans like mortgages.
Personal loans involve an individual or family “borrower” requesting a large sum of money from a friend, family member, or financial institution like a bank, to help cover the costs of a car, a house, or other large purchase. Loan agreements in these cases will state the name(s) of the borrower(s), the institution or individual loaning the money, and how the money will be repaid – with interest over months, in installments, or if there is a maximum monthly withdrawal that can then be repaid with interest (like how credit cards are used).
Commercial loans involve two institutions, in which one becomes the lender (often a bank) and one becomes a borrower. The terms of the loan frequently involve interest, plus a statement of how the institution will repay the money through rental charges or selling products.
Elements of a Loan Agreement:
Loan agreements have several sections in common, including:
• Name and contact information for both the borrower and lender
• Amount of money borrowed, with the date borrowed
• Repayment plan and options, often with due dates per month for installments or date when the lump sum repayment is due
• Amount of interest accrued, if any, and when the interest applies
• Collateral in the event the borrower defaults on the loan
• Late fees if an installment payment is late
• Cosigner, who will be responsible for aiding the borrower in the event the borrower is unable to repay the loan or the installment
• Dispute clauses to determine best practices for resolving disputes between the parties (arbitration, lawsuit, etc)
Financial institutions include other documents along with their loan agreements, such as promissory notes and copies of possible “past due” letters.
While we offer a free loan agreement template, if you have questions regarding large sums of money and how this can legally affect you, your property, and/or your credit, contact an attorney for help.