What is a Loan Agreement?

A loan agreement is a type of contract between two individuals or entities documenting the provision of goods and/or services, the method/s of payment for those items, and the terms of the payment. In this kind of written legal agreement, the lender agrees to provide services, goods, money, time, or a combination thereof to the borrower in exchange for payment (usually with interest) over a fixed length of time.

According to the latest Federal Reserve’s monthly report, consumer debt in the United States has increased to $4.07 trillion. More than half of which or about $3.005 trillion is from car and education loans while $1.065 trillion is from credit card debt.

As shown above, different types of loan agreements exist and they are usually named according to the object or commodity being exchanged. For example, a car loan agreement is made if a person wants to get a car and pay it in installments. Other kinds of loan agreements are created for personal loans, payday loans, student loans, housing loans, credit card loans, and debt consolidation loans.

How to Write a Loan Agreement

how to write a loan agreement

The best kind of loan agreement is one that protects your interests as the lender while making sure that the borrower is not being taken advantage of. A few agreement-making tips are shared below to help you write the best loan contracts ad finance documents for your lending business.

1. Be Clear on the Loan Terms

Whether you are extending a personal loan or you are crafting a loan contract for your micro-financing business, one thing should be done every time you create a loan agreement. And that is to decide on and write clear loan terms.

This refers to the loanable amount, payment schedule, repayment scheme, loan duration, interest amount, collateral, exit plan, collection, and default process. Make sure that all these pieces of information are explicitly stated on your loan agreement.

2. Use a Table to Simplify the Payment Schedule

Another way to ensure prompt loan repayment is through the addition of a payment schedule table or chart. With a data visualization tool like this, borrowers and lenders and clearly see what amount is owed and when.

Remember, loan agreements do not always have to be filled with legalese. Simplify it with the use of these simple charts or tables and you will get a well-informed client who pays back his/her debt on time.

3. Provide Alternative Payment Options (if preferred)

A good loan agreement should also incorporate multiple payment options for the borrower. This way, the borrower will have no excuse not to make the payments according to the payment agreement.

4. Add a Confidentiality Clause or a Privacy Waiver

As a legal contract document, loan agreements may include confidentiality clauses as requested by the lender and/or the borrower. Do note that such clauses are subject to your local or state laws and finance policies. When added to a loan agreement, a loan confidentiality clause may limit the number of individuals allowed to know the entire details of the loan.

On the other hand, some bank loans and microfinance loans may require borrowers to sign a financial privacy waiver or add legal confidentiality agreements since these institutions may need to conduct credit checks. This is done to determine the likelihood a borrow is able to pay back his or her loan. As a lender, it is your duty to conduct these background checks and protect your business interests.

5. Notarize the Signed Loan Agreement

Lastly, once both you (the lender) and the borrower has signed the loan agreement, make sure that you have the agreement document notarized by an attorney. This action makes the document an official and legally binding contract that both the lender and the borrower must honor.

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