A written loan agreement clarifies repayment terms and protects both lender and borrower. It is more detailed than a simple promissory note and suits larger loans.
Key terms
- Parties, principal amount and date.
- Interest rate and how it is calculated.
- Repayment schedule and due dates.
- Late fees and prepayment rules.
- Collateral or guarantors.
- Events of default and remedies.
- Governing law.
Interest and tax issues
State usury laws limit maximum interest. Large loans with little or no interest between family may have gift or imputed-interest tax effects. Ask a tax professional.
Security and enforcement
A secured loan gives the lender a claim on collateral, which requires extra steps to perfect. If the borrower defaults, a signed agreement supports a demand letter or lawsuit.
Tips
- Be realistic about the borrower's ability to repay.
- Put everything in writing and sign.
- Keep records of every payment.
- Consider a lawyer for large or secured loans.
- See our guide to promissory notes.
Frequently asked questions
Is a loan agreement the same as a promissory note?
A note is a promise to pay. An agreement adds more terms.
Can I forgive a loan?
Yes, but consider tax effects.