What Is a Loan Agreement?

A Loan Agreement is a contract between a borrower and a lender that specifies the terms and conditions of a monetary loan. It specifies key details such as the loan amount, interest rate, repayment schedule, and any collateral or security involved. 

Using a clear and comprehensive Loan Agreement template helps both parties understand their rights and responsibilities, reducing the risk of disputes and ensuring the loan terms are enforceable.

Why is a Loan Agreement important?

Regardless of who the parties in the Loan Agreement are, it’s crucial to have a written contract. This is because a verbal agreement (which may be legally binding) is often difficult to enforce. 

A written contract serves as evidence of the terms that both parties have agreed to uphold. 

Examples of Loan Agreement usage in Canada

Each of these examples can be formalized using a Loan Agreement, ensuring both parties clearly understand repayment terms and responsibilities:

• Personal loans: Used when lending money between friends or family members to cover costs such as education, weddings, travel, or emergencies.

• Business loans: Created when one business lends funds to another for operations, investment, or purchasing equipment.

• Employee loans: Provided by employers to staff as advances or short-term loans.

• Auto or vehicle loans: Used specifically to finance the purchase of a car, motorcycle, or other vehicle.

• Home equity loans: Used in conjunction with other mortgage documentation, a Loan Agreement can outline the lending terms when homeowners borrow against their property’s equity to cover large expenses or consolidate debt.

• Vendor finance: When a business offers financing directly to customers to help them buy products or equipment.

LawDepot’s Loan Agreement template is available to create a formal contract for personal or professional loans between family members, friends, businesses, or even a spouse.

Commercial Loan Agreements vs. Personal Loan Agreements

A Loan Agreement can be used for both personal and business purposes, and here’s how to you can adapt it for either purpose:

• Commercial Loan Agreements apply to business-related loans and are often used for operations, expansion, asset purchases, or project funding.

• Personal Loan Agreements are used to record loans made between individuals for personal or non-business purposes, such as lending money to family or friends or covering personal expenses. 

Promissory Notes vs. Loan Agreements

Although both documents outline an agreement to repay a loan, a Loan Agreement is generally more detailed than a Promissory Note. For example, a Loan Agreement typically includes:

• Headings: Clarifies that headings are for readability only and shouldn’t be used to interpret the contract.

• Entire agreement: States that the document represents the full agreement between the parties, with no outside or verbal terms.

• Amendments: Requires that any changes to the contract be made in writing and signed by all parties.

Important sections of a Loan Agreement

A comprehensive Loan Agreement protects everyone involved and reduces misunderstandings. Common sections include:

• Party information, such as the full legal names and addresses of the lender, borrower, and any co-signers

• Loan details, including the loan amount, disbursement date, loan purpose, and the governing jurisdiction for the agreement

• Repayment terms to outline the payments or Amortization Schedule (e.g., installments or lump sum), due dates, early repayment options or penalties, and accepted payment methods

• Interest and fees like the interest rate, whether it’s fixed or variable, how it’s calculated, and list any applicable fees

• Collateral, which is any asset used as security, including conditions for seizure or insurance requirements if the borrower defaults

• Default provisions, such as what happens in case of missed or late payments and outline lender remedies

• Signatures of all required parties (and witnesses, if applicable) and date, whether in-person or electronically 

• Governing laws of the province or territory that apply to the contract

• Dispute resolution for potential conflicts, such as through mediation, arbitration, or court action 

• General provisions that explain how to interpret the contract and outline how any amendments must be made in writing

Other clauses you may find in a Loan Agreement

Additional clauses can be included in a Loan Agreement to provide extra protection or flexibility in specific circumstances. Though they are not a requirement, these clauses include: 

1. Guarantees: A third party agrees to repay the loan if the borrower cannot, providing extra security for the lender.

2. Security or collateral provisions: Define any assets pledged as security and outline the lender’s rights if the borrower defaults on payments.

3. Insurance requirements: The borrower may be required to maintain insurance on the collateral or other assets tied to the loan.

4. Early repayment clauses: Outline whether the borrower can pay off the loan early, and any penalties or fee adjustments that apply.

5. Financial covenants: Set financial conditions the borrower must meet during the loan term, such as maintaining certain income or asset levels.

6. Assignment rights: Allow the lender to transfer or sell the loan to another party under specific conditions.

How to write a Loan Agreement

Use LawDepot’s Loan Agreement template to create a document that includes all the important clauses needed for a bona fide contract.

Simply answer our questionnaire to customize the template. Save your document as a PDF or print a copy for your records. 

1. General information

Either the borrower or the lender can use this template to create a Loan Agreement. In any case, be sure to specify the purpose of the loan and where it will take place.

People usually choose the lender's location for the Loan Agreement. However, if the loan is for an asset purchase, then the parties might choose to list the location of the assets instead.

2. Party details

Include the name and address of the borrower and the lender. You can also specify if either party is an individual or a corporation. 

You may also add a co-signer who agrees to pay the debt if the borrower defaults on the loan. A co-signer gives reassurance to the lender and may be needed if the borrower has a poor credit history. 

3. Loan terms

State the amount of money being lent to the borrower. There is no minimum or maximum requirement for a loan amount—it’s up to the lender to decide how much they’re willing to lend. 

For larger amounts, the lender may want to charge interest and/or late fees to encourage timely repayment. If so, they should specify the percentage of interest and that it's compounded yearly. 

Compound interest is based on both the original loan amount and the accumulated interest from previous periods. Interest is a way for the lender to earn money on the loan, so it’s important to consider any tax implications when charging interest. 

The lender may also penalize overdue payments by charging late fees or increasing the interest rate. This compensates the lender for the borrower's failure to pay and for the trouble of having to enforce the Loan Agreement.

Next, outline the repayment terms. The borrower may repay the loan in a single payment or regular payments. The agreement should outline: 

• The repayment schedule

• When the final amount is due

• If the borrower can repay the loan early or in lump sums

Finally, if needed, you can state whether the lender requires collateral and/or insurance. For instance, the borrower may secure the loan with collateral such as a vehicle, equipment, or jewellery. If the borrower can’t repay the full loan amount, the lender may seize the collateral. 

The lender may also require the borrower to obtain insurance if using the loan to buy a vehicle. 

4. Final details

If anything is missing from your Loan Agreement, feel free to add your own clause. For example, the lender may want to charge a fee if the borrower repays the loan early.

How to enforce a Loan Agreement in Canada

If a borrower fails to make one or more payments, the first step a lender might take to enforce their Loan Agreement is to send a Demand Letter. This formal notice reminds the borrower of their obligations to repay their loan on time. Usually, this letter states how much the borrower must pay and the deadline for doing so. 

If the borrower continues to miss payments, the lender could negotiate a new repayment plan. Otherwise, they might take legal action. This can include hiring a debt collection agency or filing a lawsuit. These actions can also negatively affect the borrower’s credit score and overall financial standing—highlighting the importance of clear payment terms in any Loan Agreement template.

How to cancel a Loan Agreement

If you think cancellation is a possibility, it might be best to add a clause that addresses how either party may cancel the contract. Otherwise, it can be difficult to back out of a Loan Agreement. An example of a cancellation clause for a Loan Agreement is as follows:

“Cancellation: Either Party may cancel this Agreement within 5 days of executing the Agreement, or as otherwise permitted by law, by sending the other Party written notice of such cancellation. Upon cancellation, the Parties must immediately return to each other what they have received from one another.”

Keep in mind that there may be laws, such as consumer protection legislation, that could allow the borrower to back out of the contract within a certain amount of time.

If all else fails, there may be some options you can take to cancel the agreement:

• If you believe the contract is fraudulent (or voidable for any other reason), speak to a lawyer to see if the contract is enforceable and what your options are to reclaim your money.

• Negotiate with the other party. If you can’t agree on a way to end the agreement, you can hire a mediator or arbitrator to help you find a solution. These processes involve a neutral third party that either guides you to reach a consensus or decides an outcome for you.

• Transfer the loan to someone else by selling the item in question. For example, if the loan was made to buy a vehicle, consider selling the vehicle to clear yourself of the responsibility of paying for it.

How to amend a Loan Agreement

To amend a Loan Agreement in Canada, you must follow a formal process to ensure any changes are valid and legally binding. The steps include:

1. Mutual agreement

Both the lender and borrower must agree to all proposed changes—neither party can amend the contract unilaterally.

2. Draft a written amendment or addendum

Document the updates clearly in writing using an Amending Agreement. Include:

• The parties to the amendment

• Background reference to the original Loan Agreement

• Specific sections or terms being changed

• The effective date of the amendment

• A statement confirming all other terms remain unchanged

• Signatures from both parties (and witnesses, if required)

3. Include updated schedules (if applicable)

For complex loans, attach revised payment schedules, updated terms, new security documents, guarantor consents, or compliance certificates.

4. Execution

Ensure all relevant parties—including guarantors, if any—sign the amendment, and provide each signatory with a copy for their records.

5. Important Considerations

 There are a few key considerations to keep in mind when amending a loan agreement:

• Material changes (such as interest rate adjustments, updated repayment schedules, or changes in collateral) require a formal written amendment rather than a verbal agreement.

• If there’s a guarantor, they must acknowledge and sign the amendment; otherwise, they may be released from liability.

• Reference the governing law for the province or territory that applies. For consumer loans, check for additional disclosure or waiting period requirements—such as cooling‑off periods in some regions, including Quebec.

• Keep the signed amendment or addendum attached to the original Loan Agreement template as part of your official records.