An introduction to loan agreements

We all know that a loan is when one party (the lender) lends money to another (the borrower), with an agreement to pay it back under certain terms and conditions; however, there are several other things it is important to know about before entering into a loan agreement. Let’s take a look at these.

What does a loan agreement look like?

Loan agreements can either be a term loan, which means the money is repaid within a certain time period, an unsecured loan, a secured loan, or a facility for drawdown.

According to Citizens Advice a secured loan is similar to a mortgage in that your house is used as security. An unsecured loan means your house is not at risk if you default, although a lender can take action in court to get the money back.

The loan agreement, which is usually drawn up by the lender, is a document that protects both parties and sets out the details of the loan and how and when the borrower will have to pay it back. Once the agreement has been executed, it is a binding commitment to pay back the lender. Even if the loan is from a family member or friend, it is a good idea to have an agreement in place to avoid any disagreements.

Is a loan agreement enforceable?

To be enforceable, a loan agreement should be a written document, signed by each party, and including the following:

Essential information

Personal information about the borrower and lender, including their full names and addresses.

Loan details

Information about the transaction, payment and interest should be included, showing the amount that will be owed once the agreement is executed. This doesn’t include any interest that may accrue but will specify what the borrower will be given in return for the amount being lent. The payment section shows how the loan will be repaid, including the payment method and frequency.

Witnesses

It is a good idea to have the agreement witnessed to ensure the document can be validated in case of dispute.