Personal and Business Loan Agreement Draft

What a good one includes

• Clearly state the exact principal sum of money being borrowed and the date it will be transferred to the borrower.
• Define whether the loan will be paid back in regular installments, as a lump sum, or on-demand, including specific due dates.
• Specify the exact interest rate being charged, how it compounds, and whether it is a fixed or variable rate.
• Outline the grace period, any penalties for late payments, and the specific actions that constitute a default on the loan.
• Clarify whether the borrower can pay off the loan early without facing financial penalties or fees.
• Identify the state laws that govern the contract and the agreed-upon method for resolving disagreements, such as mediation or arbitration.

Common mistakes to avoid

• Leaving the repayment schedule open-ended or relying on verbal promises often leads to unpaid debts and broken relationships.
• Failing to check local interest rate caps can accidentally make your agreement illegal and unenforceable in court.
• Forgetting to outline what happens if the borrower cannot pay leaves the lender with no clear legal recourse to recover their funds.
• Neglecting to secure the loan with an asset or a secondary guarantor increases the risk of total financial loss for the lender.

Frequently asked questions