How to Write a Loan Agreement

A loan agreement turns "I'll pay you back" into a clear, enforceable record. Whether it is a loan between family, friends, or businesses, putting the terms in writing protects both sides — the lender has proof of what is owed, and the borrower knows exactly what is expected. It can also keep a personal relationship from souring over money.

Our free loan agreement template covers the clauses below. Here is how to fill each one in.

1. Name the lender, borrower, and amount

State who is lending, who is borrowing, and the exact loan amount (the principal). Write the figure in numbers and, ideally, in words, so there is no ambiguity.

2. Set the interest rate — or state there is none

Say whether the loan carries interest and, if so, the rate and how it is calculated. Interest-free loans are fine — just say so explicitly. Note that many places set a legal maximum interest rate (usury limits); do not exceed what your local law allows.

3. Write the repayment schedule

This is the heart of the agreement. Choose one:

• Lump sum: the full amount is due on a single date.
• Installments: fixed payments on a schedule (e.g. $200 on the 1st of each month until paid).

State the payment amounts, dates, and the method of payment.

4. Add late payment, prepayment, and default

Cover what happens if a payment is late (grace period, late fee), whether the borrower may repay early without penalty, and what counts as default — plus what the lender can do if it happens. These clauses are what give the agreement teeth.

5. Consider collateral (optional)

A loan can be unsecured or secured by collateral (an asset the lender can claim if the borrower defaults). If you are securing the loan, identify the collateral clearly. Secured loans give the lender more protection but add formality.

6. Sign it — both parties

A signed loan agreement is a binding contract. Both the lender and borrower should sign and keep a copy. Electronic signatures are valid for loan agreements in most countries, and a signed digital copy with an audit trail is easy to store and prove.

A loan agreement and a promissory note are related but not identical: a promissory note is mainly the borrower's promise to repay, while a loan agreement is a fuller two-sided contract. For most private loans, the fuller agreement is the safer choice.

Disclaimer: This article is for general informational purposes only and is not legal or financial advice. Interest and lending rules vary by jurisdiction; consult a qualified professional for larger or secured loans.