Your Guide to a Personal Loan Agreement
Do you remember the time that you loaned someone money and they agreed to pay it back? Do you also remember that they never did? If you don’t, then you’re fortunate to have never had someone ask you for money or that someone actually paid you back. For the rest of us that do have that memory, it is the reason personal loan agreements are even a thing. Not only does a loan agreement legally bind the borrower to pay you back, but it also gives details about loan terms that everyone agrees on. What Is a Personal Loan Agreement? A personal loan agreement is a document that is created with the purpose of protecting both the borrower and the lender. The lender is typically responsible for presenting the document to the borrower. In creating an agreement like this, it’s important that you understand the different parts of the document, so nothing accidentally gets left out. There are situations where you want to have a personal loan agreement drawn up, so you’ll need to prepare one yourself or have one prepared for you. Scenarios where you should consider having a loan agreement include when you’re loaning money to someone, and you feel better about doing so if you have something in writing. If you’re the borrower, you want to have an agreement, so you have the information and expectations about when payments are due and other conditions that may exist. If you’re the lender requiring collateral, you want a loan agreement set up, too. Having the documentation is invaluable for you as you move forward with a personal loan. How Are Personal Loan Agreements Written? All personal loan agreements need to have at least some basic information about the borrower and the lender. The information is meant to identify those that are involved so there is no question about who is borrowing and who is lending. If the party doing the borrowing is an individual like your brother and the loan is a personal loan, then you need to make sure you include the borrower’s full legal name. You’ll also need their address and contact information. If the money is being lent to more than one person, everyone’s information needs to be added. Another scenario of where you will want to have a personal loan agreement is if you’re in the position of lending to a company. As an example, this happens when you have a friend or family member that wants to start a company but needs collateral. If this is the case and you’re lending money to a business, you need to make sure that all of the pertinent business contact information is there. To further cover yourself, you should consider requiring a guarantor or a co-signer. This allows you to have a path of recourse in case the borrower defaults on the loan. If you do have a guarantor, you need to make sure all of their contact information is also included in the document. The Importance of Loan Agreements Prior to lending money to anyone, you need to have a loan agreement set up to protect you and the other party involved. You may think that loaning money out isn’t a big deal because the person asking is family or a close friend, but relationships don’t guarantee repayment. Simply put, if you lend money to someone without an agreement in place, you might as well accept that you may never see it again. It becomes a “hope for the best, expect the worst” situation. Personal loan agreements take that out of the equation. Loan agreements are important because they ensure you you’ll get your money back one way or another. Even if the borrower doesn’t pay according to the predetermined terms, you still have a legal action you can pursue to make it happen. The thing is that loan agreements offer proof that the money was not gifted but borrowed. Even if it’s your best friend asking for money, a loan agreement can prevent a decades-long friendship from being destroyed. It’s always a good idea to have a loan agreement in place to cover your bases. Remember, it protects you as a lender and your borrower. The terms spelled out in the agreement let your borrower know when repayment is due, the amount expected, and the length of time they can expect to repay the loan. Loan Agreements and Contracts Loan agreements are legally binding documents, so they need to be specific regarding the loan and its terms. These details include things like transaction information, interest information, and payment requirements. These agreements are contracts, and they will explain, in depth, the amount that is ultimately owed to the lender at the conclusion of the loan. You also need to have a section within the documentation that explains what the borrower is getting as a result of the money that is being provided by the lender. It may seem like a no-brainer concept, but you need to write out in detail how the loan is expected to be repaid, and when the payments are scheduled. That means having monthly payments, lump sum payments, or any other arrangements you’ve agreed to. You should also make sure you put what kind of payment you’re going to allow. This is going to include whether or not you accept credit cards, debit payments, cash, or any other form. Going into detail about this will prevent issues as to what kinds of payment will be accepted to pay back the loan. If you’re charging interest on the loan, you want to include the details about that as well. That is going to have information about whether or not you’re charging simple interest or compound interest. You’ll also need to include whether or not the interest rate is fixed or variable. You may also want to have the option to allow for prepayment. Some lenders have penalties for prepayment and others do not, so you should make that clear to the borrower. They might want to pay it off early at some point, in which case, they’ll need to know if that’s even an option. What to Do About Personal Loan Violations Nobody wants to deal with violations especially where money is concerned. This is especially true in the face of personal loans because these often take place between friends and family. To offer a sense of security with the loan, you might consider requiring some sort of collateral. Collateral can include things like vehicles, real estate, and other types of goods that would be considered valuable and equivalent to the amount being loaned. Don’t forget to describe, again in detail, everything you can about whatever collateral is being required for you to approve lending the money in return. Having collateral can make you feel better about loaning money to someone in case you’re not sure if they’re going to pay you back. When it comes to violations, no one ever believes they’re going to happen. You want to trust your borrower, but that is easier said than done. That’s why you need to have consequences in writing as to what will happen if terms are violated. This is called a personal recourse and is meant to give you a path to recovery if you end up with a borrower that defaults on the loan. Within the personal recourse provision, you want to outline how a borrower can fix a breach of the contract if that is at all possible. A Few Last Words on a Personal Loan Agreement A loan agreement will save you whether you’re the lender or the borrower if something goes downhill. From a lender’s perspective, a loan agreement is going to provide you with a cushion in case something goes wrong with repayment. From the other side of the coin, as a borrower, having a loan agreement also lets you know exactly where you stand in terms of the loan. You’ll know the consequences of violating the loan in addition to having the repayment expectations at your fingertips. Whatever way you go, as long as you respect a personal loan the same way you would a commercial loan, the personal loan agreement would just be a formality. In a perfect world, you’d never have to invoke it, but in any other situation, you’ll be happy you have it. (kw: personal loan agreement)