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How to make a Loan agreement

A loan agreement is a contract under which a lender agrees to lend a certain amount of money to a borrower. It sets out the terms and conditions of the loan such as the interest rate and the repayment period and imposes obligations on both parties.

Protect yourself when you intend to lend money or borrow money with this loan agreement. This straightforward loan contract contains everything needed to protect the borrower as well as the lender, ensuring that both comply with the law in the process. It covers repayment details, warranties given by the borrower, obligations and restrictions on the borrower, as well as how to end the loan agreement. For more information, read Loans and promissory notes.

Use this loan agreement when:

  • you intend to lend money to either a company, partnership or LLP
  • your business intends to borrow money from another business (eg a company, partnership, LLP, or a sole trader)

Please note that where both parties are individuals (such as family members or friends) a Promissory note should be used instead of a loan agreement.

This loan agreement covers:

  • the loan amount
  • the purpose of the loan
  • when and how the borrower can withdraw funds
  • when and how the loan will be repaid
  • interest payable
  • early repayment
  • whether the loan is secured or unsecured
  • assurances or warranties given by the borrower
  • obligations and restrictions on the borrower to help ensure the lender will be repaid
  • circumstances in which the lender can demand immediate repayment of the loan

A loan agreement is an essential document whenever you need to lend or borrow money, for example, if you are starting a business and require working capital. A loan agreement outlines clearly how and when the loan will be repaid, which ensures both parties are protected during the lending process. For more information, read Loans and promissory notes.

The borrower can repay the loan either in:

  • monthly instalments
  • quarterly instalments
  • full on a specified date

When lending money, an annual interest rate applies and is calculated based on the amount of the borrowed sum. The interest rest is payable by the borrower monthly or quarterly, and can either be a fixed percentage or a percentage above the base lending rate of a bank.

In case of late payment, another daily interest rate applies, payable from the date of non-payment to the date of actual payment. The daily interest rate for late payment is a percentage above the annual interest rate.

Yes, it is possible to include a provision saying that the borrower may repay the loan in whole or in part at any time, by giving a certain notice to the lender. It is possible to include an early repayment fee, which is a percentage of the borrowed amount.

A secured loan is where the borrower promises a property or other asset to the lender as collateral for the loan. This means that the lender may take ownership of this asset if the borrower defaults on the loan.

Please note that if you want a secured loan, you will need to prepare a separate ‘Security Document’ - please Ask a lawyer for help preparing the Security Document.

When the loan is unsecured, the lender won't be able to take ownership of the borrower's assets in case of a payment default.

The lender can cancel the term of the loan and ask for immediate repayment in case of default by the borrower (ie if the borrower fails to pay the sum payable on the due date or fails to comply with any provision of the loan agreement).

Ask a lawyer:

  • for advice about whether the loan should be secured and the different types of security
  • if you want a secured loan, as you will need to prepare a separate Security Document produced

If you want to lend money to another person use a Promissory note.

This loan agreement is governed by the law of England and Wales or the law of Scotland.

Other names for Loan agreement

Loan contract, Money lending agreement.