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5 things you must have in your loan agreement

Whenever you and a relative, friend or business associate plan to borrow and/or lend money between you, it is essential to draw up an official agreement document. All commercial lenders provide agreements to borrowers before approving loans, however, you will need to invest in your own agreement documentation in all other circumstances.

What are loan agreements?

Loan agreement documents come in several different varieties, with IOUs and promissory notes being two of the most popular.

An IOU is a basic agreement and is most commonly used for small sums of money being borrowed between relatives or friends.

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Promissory notes also state the amount of money that is owed as well as repayment terms and an interest rate. Promissory notes can be secured with collateral and in this scenario, a financing statement may also be required.

What information should be included in loan agreements?

There are a variety of different provisions within enforceable loan agreements, additional information can be seen here: https://www.parachutelaw.co.uk/loan-agreement.

1. Party Identification

In addition to including the full legal names of the borrower and the lender, legal experts also recommend including the address of each party involved in the transaction.

2. Agreement Date

To ensure that all parties understand what is expected from this agreement, it is important to clearly state the date on which the agreement has been formally made. This key piece of information should be included at the beginning of the document and/or in the space above the signature of each relevant party.

3. Loan Amount

The first paragraph of most loan agreements clearly states the total sum involved in the loan. Again, it is important to make this as clear as possible to avoid misunderstanding or confusion.

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4. Applicable Interest Rates

If the lender wants to charge interest on their loan, the rate at which this will be charged must be clearly stated in any agreement. It is important to seek legal advice here, as there may be legal limits that you will need to be aware of. Additionally, as stated on the gov.uk peer-to-peer lending webpage, all interest received on a loan is taxable.

5. Terms of Repayment

Loans can be repaid in three different ways.

– Instalments

Most loans are repaid on an instalment basis. With this type of agreement, the borrower is required to make repayments periodically until such a time that the loan and any accrued interest has been paid back in full.

– End of Term

With a payment at the end of the term agreement, both parties will agree a date by which the initial loan amount as well as any interest that may have accrued throughout the term should be paid back in full.

– On Demand

Lenders can choose to request a repayment on demand agreement, which requires borrowers to make a repayment within a specific notice period. It is important to clearly set out the length of any applicable notice period to avoid future issues.

Hi, I am Alex; I am an entrepreneur, father, mentor, and adventurer passionate about life. At this moment, I am working with home and decor.