Your personal loan agreement is the document that contains everything you need to know about the deal you’re making with your lender, including your rights and responsibilities as well as theirs. It’s a fairly long and complex form, but breaking it down can make it easier to understand.
Here, take a closer look at personal loan agreements.
Key Points
• A personal loan agreement outlines loan terms and conditions, providing legal protection for both the lender and the borrower.
• Key elements include parties, loan amount, interest rate, repayment terms, default provisions, governing law, and signatures.
• Steps to write a personal loan agreement include choosing to DIY or work with a lawyer, gathering details, agreeing on terms, listing payment and legal details, and signing.
• Additional documents for loan approval typically include proof of identity, income verification, and proof of address.
• A personal loan agreement is legally binding, enforceable in court if obligations are not met.
Personal Loan Agreements Defined
A personal loan agreement, as mentioned above, is a document that details exactly what is being agreed to on both sides of a personal loan — lender and borrower. At the very least, it will state how much money is being loaned and the terms and conditions of the borrower’s repayment responsibilities.
But what about a personal loan that is not with a traditional lender? Private lenders can be individuals or organizations that make loans to individuals, sometimes without the qualification requirements of traditional lending institutions. A private personal loan agreement is drafted as part of a private personal loan — one made between a private lender and a borrower.
Any personal loan agreement is a legally binding document, so it’s important to understand it in full before you apply your signature.
Key Elements of a Personal Loan Agreement
Say you’ve applied for a personal loan. If you qualify, you’ll move along to a personal loan agreement. Among the key elements of a personal loan agreement are:
• Parties involved: The lender and borrower, including their legal names and addresses.
• Loan amount: The amount of money being borrowed, also known as the principal.
• Interest rate: This is typically expressed as an annual percentage rate (APR), which reflects the total cost of borrowing over a year.
• Repayment terms: How and when the loan will be repaid, including the payment schedule, payment frequency, and loan term.
• Default provisions: The consequences of failing to make payments, such as late fees and potential actions the lender can take. Also, you may want to be sure severability clauses are spelled out, stating what happens if one aspect of the agreement is deemed unenforceable.
• Governing law: Specify which jurisdiction’s laws will govern the agreement in the event that there are disputes.
• Signatures and date: These are needed from both the lender and borrower.
You might also include details on any loan collateral, late and early payment (prepayment) penalties, and guarantors or cosigners, as needed.
Why Is a Loan Agreement Needed?
A personal loan agreement is essentially a protective document. It protects both the lender and the borrower by laying out, in clear terms, exactly what is being agreed to. If either party fails to uphold the agreement, action can be taken — such as the lender seizing any assets offered as collateral or sending the account to collections — both of which, obviously, would be bad for the borrower.
But the document works both ways. Lenders, too, are subject to lender liability and can be taken to court if they fail to uphold their end of the loan agreement. Although these cases are far less common than borrower default, the loan agreement is a document that can be used for the borrower’s protection as well.
How to Write a Personal Loan Agreement in 5 Steps
Here are the usual steps to writing a personal loan agreement.
1. Decide Whether to DIY It or Hire a Lawyer
Loan paperwork is often created by the lending institution. For private loans, depending on the specifics of your loan and situation, you could write up a simple agreement by hand or draft it on your computer and then print it out for signing, if you are working toward a private loan. Or you might download a template from a reputable site, which can be a popular option. These are often free or are sometimes available for a small fee.
However, if the loan is complicated or you don’t want to handle the agreement yourself, you could look into hiring a lawyer to draw up the paperwork. Either way, a personal loan agreement will be a legally binding arrangement. Hiring a lawyer will likely be a costlier proposition.
2. Gather the Necessary Personal Details
You will need the legal names and addresses of both parties. This ensures the lender can’t ask you for anything beyond the borrowed principal (plus interest, which will also be listed).
3. Agree to and Spell Out the Loan Terms
The loan agreement should list the payments that will be expected each month and the expected date of the conclusion of the loan term.
The interest rate for the personal loan should also be on the personal loan agreement, likely expressed as an APR, which shows what percentage of the loan principal you’ll end up paying back in the course of one year including interest and any additional fees that may be packaged into the loan.
The interest rate will vary based on your credit score and other financial factors. If you have decent credit, you’ll likely be able to qualify for a personal loan. But generally speaking, the higher your score, the lower your rate.
Recommended: Personal Loan Calculator
4. List Payment and Legal Details
A personal loan agreement should also include the following, as noted above:
• The loan agreement may list which types of payment are acceptable, such as check, bank transfer, or credit card.
• The personal loan contract should also list specific repayment conditions, including when payment is due and whether or not additional principal can be applied without penalty.
• A complete personal loan agreement should include details on how any disputes will be handled between the parties involved.
• Some personal loan documents may include the option to change your loan’s term (the period over which the loan is repaid).
• Personal loan contracts in the United States should stipulate which state’s laws will be used to govern and interpret the agreement if the borrower lives in a different state than the lender is headquartered.
• Severability is a clause that states that even if one part of a contract is found to be unenforceable or otherwise rendered null and void, the remainder of the agreement will still hold.
• Penalties associated with the personal loan, such as any late fees that may be assessed, at what point the loan will go into arrears or default, or other scenarios, should be listed in the contract as well.
5. Sign the Document
Finally, the contract for loaning money must be signed by the borrower and the lender in order to be made legally binding.
Recommended: Comparing Personal Loans vs Business Loans
Other Personal Loan Documents
Along with the signed personal loan agreement, other typical personal loan requirements include the following:
Proof of Identity
Your driver’s license or some equivalent form of photo ID will likely be necessary in order to verify your identity.
Income Verification
Lenders will consider your income when qualifying you for a loan — after all, they have good reason to be interested in whether or not you’ll be able to repay the debt. Along with asking you to list your annual income, verifying documents such as tax returns may also be required.
Proof of Address
In order to prove your residence, and therefore eligibility for any type of personal loan, you may need to provide utility statements, bank statements, or other official documents.
The Takeaway
If you’re considering a personal loan, reading the loan agreement in depth is a good way to understand for sure what you’re agreeing to. That loan agreement will contain many details about funds borrowed and how they will be repaid, and it serves to protect both the lender and the borrower.
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FAQ
Does a personal loan agreement need to be notarized?
No, a personal loan agreement does not need to be notarized to be legally binding — it simply needs to be signed by each party to the agreement.
What is a private personal loan agreement?
A private personal loan agreement is the binding legal contract between a borrower and a private lender for a personal loan.
Why do you need a loan agreement?
The personal loan agreement serves to outline the specific terms of the loan and protect both parties in case either fails to uphold the agreement.
Can a personal loan agreement be legally enforced?
Yes, a written and signed agreement for a loan can be legally enforced. It’s a binding contract.
What happens if a borrower defaults on a personal loan agreement?
If a borrower defaults on a personal loan, they will face negative impacts to their credit score, potential legal action from the lender, and they might find that their account is turned over to collections. They might also be charged late fees and a higher interest rate on the remaining balance due.
Photo credit: iStock/Chaay_Tee
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