Key Takeaways
- The terms “personal loan agreement” and “personal loan contract” refer to the same kind of document.
- Any personal loan agreement should include clear terms of repayment, including the interest rate and payment schedule.
- Even when lending money between friends or relatives, a personal loan agreement is important to have.
What Is a Personal Loan Agreement?
A personal loan agreement is a legally binding document designed to clearly define the terms of repayment for a loan, in addition to what’s expected of the borrower and the lender. It should include information about the amount borrowed, the interest charges associated with the loan, any fees that are part of the process, and a repayment schedule that details when the loan should be repaid and what installments will be used.
Because a personal loan contract is legally binding, a lender can take a borrower to court and have repayment ordered, including in the form of wage garnishment, a lien, or some other recourse.
In many cases, personal loans are unsecured, meaning you don’t need to have some form of collateral to secure the loan. Basically, your creditworthiness is what’s considered, not whether you have something valuable like a car or a home that can be repossessed to offset any credit risk. While it’s possible for a lender to offer a personal loan that requires collateral to secure it, it’s relatively uncommon.
Official lenders like banks, credit unions, and online lenders have their own agreements that you must sign. It might be tempting not to formalize the process for loans between friends or relatives, but this can be a mistake. Using a personal loan agreement when lending to family or friends can ensure that everyone remembers the terms of the loan, in addition to establishing a more official and professional acknowledgment of the debt and when it should be repaid.What Should Be on a Personal Loan Contract?
Whether you’re signing a personal loan agreement created by someone else or making your own contract, it’s important to make sure you have the necessary information included so that everything is accounted for and the terms are clear.- Identities of involved parties: Both the borrower and the lender should be identified by name and address. Further information, such as Social Security numbers (SSNs) and driver’s licenses, may also be included as part of a personal loan contract.
- Date of the agreement: Be sure to include the date when the agreement is made and the date when the agreement goes into effect at the beginning of the contract. There should be dates with the signatures as well.
- Loan amount: Include the total amount of the principal (amount being borrowed). If collateral is used to secure the loan, it should also be listed.
- Interest rate: Be sure to include the interest rate, including whether it’s variable or fixed. You should also include the annual percentage rate (APR), which comprises fees as well as interest charges. This will help calculate the total amount to be repaid.
- Repayment schedule: Include the repayment schedule. Often, the schedule is a monthly installment, but it could also be weekly, biweekly, on demand, or at the end of a specified time period.
- Penalties and default provisions: If there are late fees or other penalties, these should be spelled out in the contract. Also, the personal loan agreement should include what constitutes a default and what action can be taken in a court of law, including recovery of collateral, if applicable.
- Jurisdiction or choice of law: Be clear about which state the personal loan agreement is governed by.
- Severability clause: If one part of the personal loan contract is considered illegal or unenforceable, the severability clause is designed to ensure that the rest of the agreement remains binding.
- Entire agreement clause: This specific clause states that the personal loan contract is the entire agreement and that no verbal or other arrangements are part of the agreement.
- Signatures: The borrower and the lender should each sign at the bottom of the agreement. In some cases, it might make sense to have witnesses sign as well or have the document notarized.
How to Write a Personal Loan Agreement
When writing a personal loan agreement, it’s important to make sure that you review the document and ensure that it has all the elements of a personal loan contract. It can be a very simple agreement that states each item in its own section.
You can create a hard-copy version or use a service like DocuSign or eSign to complete the paperwork online. You can also find templates on websites like LegalZoom, LawDepot, and Rocket Lawyer. Below, see a sample personal loan agreement from .Do Lenders Always Require a Personal Loan Contract?
Can the Terms of a Personal Loan Contract Be Changed Over Time?
What Happens If I Don’t Comply with the Terms of a Loan Contract?
If you don’t comply with the terms of a loan contract, you might be taken to court for legal recourse. This can lead to a lawsuit, ending with a judge potentially requiring a specific payment plan or garnishing your wages to complete the terms.
Is a Loan Contract Between Friends or Family Different from a Loan Contract with a Bank?
How Do People Use Personal Loans?
daftarlapak303.commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.