Last updated April 4, 2023
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 money loan.
Use LawDepot’s Loan Agreement template to create a formal contract for personal or professional loans between family members, friends, businesses, or even a spouse.
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 is evidence of the terms that both parties agreed to uphold.
What’s the difference between a Loan Agreement and a Promissory Note?
Although these documents both detail a loan repayment agreement, a Loan Agreement is slightly more comprehensive than a Promissory Note. For instance, LawDepot’s Loan Agreement template includes the following clauses (while our Promissory Note does not):
- General provisions and severability: Clarifies how the wording of the contract should or shouldn’t be interpreted (e.g., headings are included for clarity, not for courts to interpret when enforcing the contract).
- Entire agreement: Specifies that the contract makes up the entire agreement between the parties. There aren’t any other provisions, verbally agreed to or otherwise.
- Amendments: Both parties in the contract must agree in writing to any term changes.
How do I write a Loan Agreement?
Use LawDepot’s Loan Agreement template to create a document that includes all the important clauses needed for a bonafide contract.
Simply answer our questionnaire to customize the template. Save your document as a PDF or print a copy for your records.
The information you’ll need to write your Loan Agreement is as follows:
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 there’s anything 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.
Should I notarize my Loan Agreement?
Although it’s not required, notarizing your contract is an excellent way to verify the signatures and identities of the people involved in the Loan Agreement. This helps reinforce the parties’ capacity and intention to enter into the agreement.
Another option is to sign the contract in front of a witness. In this case, the witness should be a neutral third party (i.e., someone with no interest in the document).
Without a notary public or witness to attest to the document’s authenticity, any dispute brought to court may end up being one party’s word against the other’s.
Are Loan Agreements legally binding?
There are certain elements that must be present to create a valid and enforceable Loan Agreement:
- Offer and acceptance: The lender offers a certain amount of money to the borrower, on the condition that they meet certain terms for repayment. The borrower accepts the offer.
- Consideration: Each party exchanges something of value. In this case, the borrower gets a certain amount of money, and the lender gets a promise to be repaid. The lender may also benefit from interest charges or late fees.
- Intention: The parties mutually agree to enter into a binding contract. This element is also known as a “meeting of the minds”.
- Legality: All elements of the contract must abide by Canadian laws. For instance, the loan cannot be made for a purpose that is against the law (e.g., funding an illegal operation).
- Capacity: Each party must have the legal capacity to enter the contract, which means they’re competent adults.
How do I enforce a Loan Agreement?
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.
How do I 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 your options 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 from the responsibility of paying for it.
What happens if the borrower or lender dies before repaying the loan?
If the borrower dies before paying off the loan, authorities will use their assets to pay the remainder of the debt. If there is a co-signer, the responsibility for the debt falls to them.
If the lender dies before receiving the complete repayment, the borrower owes to the lender’s estate. In this case, the beneficiaries of the lender’s estate will collect the remainder of the debt.
If the loan is for a significant amount, it’s important that you update your Last Will to specify how you want to deal with the outstanding loan upon your death.
