Loan Agreement
Loan Agreement Generator
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Signature Requirements
Electronic Signature Accepted
Loan agreements are fully valid with electronic signatures under the ESIGN Act and UETA. Both the lender and borrower must sign. Notarization is optional but may be required if the loan is secured by real property.
Sample Loan Agreement Generated by Legal Tank
Loan Agreement
Parties and Recitals
This Loan Agreement (the "Agreement") is entered into as of [____________] (the "Effective Date") by and between [____________] (the "Lender"), a [individual/entity organized under the laws of the State of ____________], with a principal address at [____________], and [____________] (the "Borrower"), a [individual/entity organized under the laws of the State of ____________], with a principal address at [____________]. Lender and Borrower are sometimes referred to herein individually as a "Party" and collectively as the "Parties."
WHEREAS, Borrower has requested that Lender extend credit to Borrower in the amount and on the terms set forth herein; and WHEREAS, Lender is willing to extend such credit subject to the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows.
Loan Amount and Disbursement
Subject to the terms and conditions of this Agreement, Lender agrees to lend to Borrower and Borrower agrees to borrow from Lender the principal sum of [$__________] (the "Loan"). The Loan shall be disbursed to Borrower in a single advance on the Effective Date, or at such other time as mutually agreed upon by the Parties, by wire transfer or check to an account designated by Borrower. Borrower acknowledges that the Loan proceeds are intended for [____________] and shall be used solely for such purpose.
Lender's obligation to fund the Loan is subject to the satisfaction of all conditions precedent set forth herein, including but not limited to: (a) execution and delivery of this Agreement and all related loan documents; (b) accuracy of Borrower's representations and warranties as of the funding date; (c) no Event of Default or event that with the passage of time would constitute an Event of Default; and (d) delivery of any Collateral and related perfection documents required under Article V.
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Interest
The outstanding principal balance of the Loan shall bear interest at a rate of [____]% per annum (the "Interest Rate"), calculated on the basis of a 360-day year and actual days elapsed, from the date of disbursement until the Loan is repaid in full. Interest shall accrue daily and be compounded [monthly/quarterly/annually]. In no event shall the Interest Rate or any fees charged hereunder, in the aggregate, exceed the maximum rate permitted by the usury laws of the State of [____________] (the "Maximum Lawful Rate").
Upon the occurrence and during the continuance of an Event of Default, the outstanding principal and, to the extent permitted by law, all other amounts due hereunder shall bear interest at the Default Rate of [____]% per annum, or the Maximum Lawful Rate, whichever is less. If any interest or charge hereunder is determined by a court to be usurious, Lender shall apply such excess first to accrued interest, then to principal, and shall refund any remaining excess to Borrower. The Parties intend to conform strictly to applicable usury laws.
Repayment Schedule
Borrower shall repay the Loan in [____] consecutive [monthly/quarterly] installments, each in the amount of [$__________], commencing on [____________] and continuing on the [____] day of each [month/quarter] thereafter, with a final payment of all remaining principal, accrued interest, and other amounts due on [____________] (the "Maturity Date"). Installment payments shall be applied first to fees and Late Charges, then to accrued interest, and then to principal reduction.
If any scheduled payment date falls on a day that is not a Business Day, such payment shall be due on the immediately following Business Day, with interest continuing to accrue for the additional days. A late charge equal to [____]% of any installment amount not received within [____] days of the due date shall be assessed (the "Late Charge"). Borrower may prepay the Loan in whole or in part at any time without penalty upon [____] days' written notice to Lender.
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Collateral
To secure the prompt payment and performance of all Obligations under this Agreement, Borrower hereby grants to Lender a first-priority security interest in the following property (the "Collateral"): [____________]. The security interest granted herein is governed by Article 9 of the Uniform Commercial Code as enacted in the State of [____________] ("UCC"). Borrower authorizes Lender to file UCC-1 financing statements and any amendments or continuations thereof as necessary to perfect the security interest.
Borrower shall maintain the Collateral in good condition, free from liens and encumbrances other than the lien created hereby and Permitted Liens. Borrower shall maintain insurance on the Collateral against loss or damage in amounts and with carriers satisfactory to Lender, naming Lender as loss payee. Borrower shall not sell, lease, transfer, or otherwise dispose of any Collateral without Lender's prior written consent, and shall promptly notify Lender of any event that materially diminishes the value of the Collateral.
Representations and Warranties
Borrower represents and warrants to Lender as of the Effective Date and as of each date on which a payment is made hereunder: (a) Borrower has the legal capacity and authority to execute, deliver, and perform this Agreement; (b) this Agreement constitutes the legal, valid, and binding obligation of Borrower, enforceable in accordance with its terms; (c) the execution and performance of this Agreement does not conflict with any law, regulation, order, or agreement binding upon Borrower; (d) there is no pending or threatened litigation, arbitration, or governmental investigation that could materially affect Borrower's ability to perform the Obligations.
Borrower further represents and warrants: (a) all financial statements and information furnished to Lender are true, complete, and accurate in all material respects as of the date provided and fairly present Borrower's financial condition; (b) Borrower is solvent and able to pay debts as they become due; (c) Borrower has filed all required tax returns and paid all taxes due, except those being contested in good faith with adequate reserves; (d) Borrower holds all licenses, permits, and authorizations necessary to conduct its business and to own and operate the Collateral.
Covenants
During the term of this Agreement, Borrower covenants and agrees to: (a) use the Loan proceeds solely for the purposes stated herein; (b) furnish to Lender annual financial statements within [____] days after the end of each fiscal year and such other financial information as Lender may reasonably request; (c) promptly notify Lender of any Event of Default or any event that with the passage of time or giving of notice, or both, would constitute an Event of Default; (d) maintain all insurance policies required by this Agreement; (e) comply with all applicable laws, regulations, and orders in the conduct of its business.
Without the prior written consent of Lender, Borrower shall not: (a) incur additional indebtedness in excess of [$__________] in the aggregate; (b) create, assume, or permit any lien or encumbrance on the Collateral other than Permitted Liens; (c) make any distribution, dividend, or payment to equity holders if an Event of Default exists or would result therefrom; (d) enter into any merger, consolidation, or sale of all or substantially all assets; (e) make any material change in the nature of its business or organizational structure.
Events of Default
Each of the following events shall constitute an "Event of Default": (a) failure to pay any amount due hereunder within [____] days after the date when due; (b) breach of any representation, warranty, or covenant contained herein that remains uncured for [____] days after written notice; (c) commencement of bankruptcy, insolvency, receivership, or similar proceedings by or against Borrower; (d) entry of a judgment against Borrower in excess of [$__________] that remains undischarged for [____] days; (e) any material adverse change in Borrower's financial condition; (f) any default under any other agreement between Borrower and Lender (cross-default).
Upon the occurrence of an Event of Default under clauses (a), (b), (d), (e), or (f) above, Lender may, by written notice to Borrower, declare all Obligations immediately due and payable. Upon the occurrence of an Event of Default under clause (c), all Obligations shall automatically become immediately due and payable without notice or demand. The exercise of remedies under this Article shall not limit Lender's right to pursue any other remedy available at law or in equity.
Remedies
Upon the occurrence of an Event of Default, Lender shall have all rights and remedies available under this Agreement, the UCC, and applicable law, including: (a) the right to take immediate possession of the Collateral; (b) the right to sell or otherwise dispose of the Collateral at public or private sale upon [____] days' prior written notice to Borrower (or such shorter notice as permitted by law); (c) the right to apply the proceeds of any Collateral disposition to the Obligations in such order as Lender determines; (d) the right to pursue a deficiency judgment against Borrower for any amount remaining unpaid after disposition of the Collateral.
All rights and remedies of Lender under this Agreement are cumulative, may be exercised simultaneously or in any order, and shall not be deemed exclusive of any other rights or remedies available at law, in equity, or by statute. Lender's failure or delay in exercising any right shall not constitute a waiver thereof. Borrower shall be liable for all costs and expenses incurred by Lender in enforcing this Agreement, including reasonable attorneys' fees, court costs, and collection agency fees.
Governing Law and General Provisions
This Agreement shall be governed by and construed in accordance with the laws of the State of [____________], without regard to conflict of laws principles. Any dispute arising out of or relating to this Agreement shall be resolved exclusively in the state or federal courts located in [____________] County, [____________], and each Party irrevocably submits to the personal jurisdiction of such courts and waives any defense of inconvenient forum.
This Agreement, together with all exhibits, schedules, and ancillary documents referenced herein, constitutes the entire agreement between the Parties with respect to the Loan and supersedes all prior and contemporaneous agreements, negotiations, and understandings, whether oral or written. This Agreement may not be amended or modified except by a written instrument signed by both Parties. If any provision hereof is held invalid or unenforceable, the remaining provisions shall continue in full force and effect.
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What Is a Loan Agreement?
A loan agreement is a legally binding contract between a lender and a borrower that establishes the terms and conditions under which money is lent, including the principal amount, interest rate, repayment schedule, and consequences of default. Unlike a simple promissory note, which is a unilateral promise by the borrower to repay, a loan agreement is a bilateral contract containing mutual obligations, representations, warranties, and covenants from both parties. Loan agreements are governed primarily by state contract law, the Statute of Frauds, and, for consumer transactions, by federal regulations including the Truth in Lending Act (TILA). The loan agreement is the foundational document for any lending relationship, whether between individuals, businesses, or financial institutions.
The enforceability of a loan agreement depends on several legal requirements. Under the Statute of Frauds, which has been adopted in every state, agreements that cannot be performed within one year must be in writing to be enforceable, which means virtually all loan agreements with repayment periods exceeding twelve months require a written document. Usury laws impose maximum interest rates that vary significantly from state to state, and a loan agreement that charges interest exceeding the applicable usury limit may be deemed void or subject to penalties including forfeiture of all interest. The annual percentage rate (APR) disclosure required by the Truth in Lending Act applies to consumer credit transactions and must include not only the stated interest rate but also any fees, points, or charges that effectively increase the cost of borrowing. A loan agreement should be distinguished from a Promissory note form, which is a simpler instrument that may accompany a loan agreement or stand alone for less complex transactions.
Loan agreements can be structured as secured or unsecured obligations. A secured loan agreement includes provisions pledging specific collateral that the lender can seize if the borrower defaults, while an unsecured loan agreement relies solely on the borrower's creditworthiness and the lender's ability to obtain a judgment through litigation. The acceleration clause is one of the most important protective provisions for the lender, allowing the lender to demand immediate repayment of the entire outstanding balance if the borrower misses a payment or breaches any other covenant in the agreement. Amortization schedules define how each payment is allocated between principal and interest, and whether the loan is structured as an installment loan, a balloon payment loan, or a demand loan. For business loans, the agreement may include financial covenants requiring the borrower to maintain certain financial ratios, provide periodic financial statements, and obtain the lender's consent before incurring additional debt.
Personal loan agreements between family members or friends are particularly important because they establish the transaction as a bona fide loan rather than a gift, which has significant tax implications. The IRS requires that loans between related parties charge at least the Applicable Federal Rate (AFR) of interest; otherwise, the IRS may impute interest income to the lender and treat the below-market interest as a taxable gift. A properly documented loan agreement also protects the lender's ability to claim a bad debt deduction under IRC Section 166 if the borrower defaults and the debt becomes uncollectible. Whether the loan is between individuals or businesses, a detailed loan agreement that clearly defines all terms reduces the likelihood of disputes and provides a clear legal framework for enforcement. Consider pairing a loan agreement with a Free service agreement when the loan is connected to a business services relationship.
| Feature | Loan Agreement | Promissory Note |
|---|---|---|
| Type | Bilateral contract (mutual obligations) | Unilateral promise to pay |
| Complexity | Detailed, covenants, reps, warranties | Simple, payment terms and default |
| Best For | Large or complex loans, business lending | Simple personal loans, family loans |
| Collateral Provisions | Can include detailed security terms | Usually references separate security agreement |
| TILA Disclosure | Required for consumer loans | Required for consumer loans |
Why You Need a Loan Agreement
You are lending money to a family member or friend and need a written agreement to establish the transaction as a bona fide loan rather than a gift, preserving your ability to claim a bad debt deduction and avoiding gift tax implications. Review our free loan agreement template to see the essential provisions for family and personal loans.
Your small business needs to formalize a loan from an investor or partner with clear terms for interest, repayment, and default to protect both parties and satisfy accounting and tax requirements. Get a quote for your loan agreement to ensure your document complies with state usury laws and IRS requirements.
You are borrowing money for a real estate purchase, vehicle acquisition, or business expansion and need a complete agreement that documents the interest rate, collateral, and repayment terms. You may also need a Sample promissory note to accompany the loan agreement.
You want to establish a line of credit or revolving loan facility with defined draw periods, interest calculations, and repayment obligations that protect the lender while providing flexibility to the borrower.
You are a private lender making loans to individuals or businesses and need a standardized agreement template that complies with state usury laws and, for consumer loans, Truth in Lending Act requirements. Pairing the loan agreement with a bill of sale can document the transfer of collateral in the event of default.
Related Contracts & Agreements Documents
Loan Agreement is often used alongside other contracts & agreements documents. Depending on your situation, you may also need:
Key Sections in a Loan Agreement
Loan Amount and Disbursement
This section specifies the principal amount of the loan, the currency, and the method and timing of disbursement. It may address whether the loan is disbursed in a single lump sum or in multiple draws, and any conditions that must be satisfied before the lender releases funds.
Interest Rate and APR
The interest section establishes the applicable interest rate, whether it is fixed or variable, how interest is calculated (simple or compound), and the effective annual percentage rate. For consumer loans, TILA requires clear disclosure of the APR and total finance charges. The rate must comply with applicable state usury laws.
Repayment Schedule
The repayment section defines the payment amount, frequency, due dates, and the total number of payments. It specifies whether payments are structured as equal installments, interest-only with a balloon payment, or another amortization method. Late payment penalties and grace periods are also addressed here.
Default and Acceleration
This section defines the events that constitute default, such as missed payments, breach of covenants, bankruptcy, or material misrepresentation. It includes the acceleration clause, which allows the lender to demand immediate repayment of the entire outstanding balance upon default, and describes the notice requirements and cure periods.
Collateral and Security Interest
For secured loans, this section describes the collateral pledged by the borrower, the lender's security interest, and the borrower's obligations to maintain and insure the collateral. It references the security agreement and any UCC-1 financing statement that will be filed to perfect the lender's interest.
Representations and Warranties
Both parties make specific representations and warranties in this section. The borrower typically represents that the information provided in the loan application is accurate, that they have the legal capacity to enter the agreement, and that no other obligations conflict with the loan terms. The lender may warrant that it has the authority to extend the loan.
Prepayment Terms
The prepayment section addresses whether the borrower may repay the loan early, whether any prepayment penalties apply, and how prepayments are applied to the outstanding balance. Some loan agreements prohibit prepayment during an initial period, while others encourage early repayment by waiving penalties.
Governing Law and Dispute Resolution
This section identifies the state whose laws govern the agreement and establishes the method for resolving disputes, whether through litigation, arbitration, or mediation. It may include a jurisdiction and venue selection clause, a waiver of jury trial, and provisions for the recovery of attorney fees by the prevailing party.
Loan Agreement Legal Requirements
The Statute of Frauds, adopted in all states, requires that loan agreements with repayment terms exceeding one year must be in writing and signed by the party to be charged in order to be enforceable in court.
State usury laws establish maximum permissible interest rates that vary significantly by jurisdiction, and loans that exceed the applicable ceiling may be void, subject to interest forfeiture, or expose the lender to statutory penalties.
The Truth in Lending Act (15 U.S.C. Section 1601 et seq.) and Regulation Z require lenders in consumer credit transactions to disclose the annual percentage rate, total finance charges, payment schedule, and total amount payable before the loan is consummated.
For loans between related parties, IRS Revenue Ruling 77-274 and IRC Section 7872 require that the loan charge at least the Applicable Federal Rate of interest; otherwise, the IRS will impute interest income and may characterize the below-market element as a gift.
UCC Article 9 governs the creation, perfection, and enforcement of security interests in personal property collateral pledged under a secured loan agreement, requiring the filing of a UCC-1 financing statement to establish priority over other creditors.
Common Loan Agreement Mistakes to Avoid
Failing to charge at least the IRS Applicable Federal Rate on loans between family members, which can result in imputed interest income to the lender and gift tax consequences for the below-market interest benefit.
Setting an interest rate that exceeds the applicable state usury limit, which can render the entire loan agreement void or subject the lender to forfeiture of all interest and potentially treble damages in some jurisdictions.
Not including an acceleration clause, which forces the lender to sue for each missed payment individually rather than demanding the full outstanding balance upon default.
Omitting clear default provisions and cure periods, which creates ambiguity about when the lender can exercise remedies and may delay the lender's ability to collect on the debt.
Using a verbal loan agreement for a loan with a repayment period exceeding one year, which violates the Statute of Frauds and may render the agreement unenforceable in court.
Failing to comply with Truth in Lending Act disclosure requirements for consumer loans, which can expose the lender to statutory damages, attorney fees, and potential rescission of the transaction.
Frequently Asked Questions About Loan Agreements
What is a loan agreement?
Is a loan agreement legally binding?
What should be included in a loan agreement?
What is the difference between a loan agreement and a promissory note?
Do personal loans need a written agreement?
What is usury and what are usury laws?
Can I lend money without a license?
What happens if a borrower defaults on a loan agreement?
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