How To Write a Loan Contract:
6 Steps to Follow

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What Is a Written Loan Contract?

A loan contract, also known as a loan agreement, is a legally binding document between a lender and a borrower that sets the terms and conditions for loaning money.

For instance, a borrower borrowing money for school would sign a loan contract with a lender that defines the repayment schedule, interest rates, terms and conditions and default consequences for both parties.

A written loan contract is essentially used to create legally binding terms between the lender and borrower that can be upheld in the court of law. Typically, a lender will need to receive and review loan documents before approving the loan.

Types of Loan Contracts

There are three types of loan contracts based on their repayment terms:

  • Term Loan Contracts : A term loan, generally used by businesses, is used when the borrower borrows a specific amount from the lender and promises to pay back the amount with interest over a set period of time.
  • Revolving Loan Contracts : A revolving loan agreement allows borrowers to draw funds up to a set limit, repay and then redraw the same amount. Credit cards use revolving credit lines. Borrower may make multiple loans while their contract is active, given that they repay the last loan amount.
  • On-demand Loan Contracts: Demand notes can be used for short-term borrowing. They are often used by family and friends to borrow money from each other. Unlike most large loans, these do not require a collateral and are often for a small amount. On-demand loan contracts ensure that the repayment is made on demand by the lender, given that a reasonable notice has been given to the borrower.

Here is more on types of loan agreements.

How To Write a Loan Contract – Step by Step

Here are 6 easy steps to writing a personal loan contract:

  1. Introduce the Agreement : You should include the date, title and type of loan agreement in the very beginning of the document.
  2. Write the Terms of the Loan : Your loan agreement should include the terms and conditions of the loan. The purpose of the personal payment agreement, terms of repayment, and interest rates should be included here.
  3. Date the Document: Remember to date the document when the agreement is made. Since repayment plans are generally dependent on the date of loan, this is a key element you should not miss.
  4. Statement of Agreement : Your loan agreement should always include the statement of agreement. This could be something similar to the following statement, “The lender and borrower agree to the above listed terms.” This ensures that both parties acknowledge and agree to the terms in the agreement.
  5. Sign the Document : Both the lender and the borrower need to sign the document, or create a signed contract , for it to be legally enforceable.
  6. Record the Document : You should also record the document at the county recorder’s office. This will protect the loan in case either party loses the paperwork.

Wondering what a loan agreement looks like? Here is a sample for you .

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What’s Typically Included in Loan Contracts?

There are some common terms used in all loan contracts. Here are the key elements to include in any loan contract:

  • Choice of Law: Your loan contract must include relevant national, state and local laws that would be used to interpret the loan contract. This is typically included in the choice of law clause .
  • Involved Parties: You will need to mention the personal information about the borrower and in the loan agreement. This information should include the names, addresses and phone numbers for both parties. If the loan involves a cosigner, the cosigner information should also be detailed in this section.
  • Loan Details: Any loan agreement will mention loan details such as the amount borrowed, date of loan, repayment date, interest rate, and annual percentage rate. If the loan uses a collateral, mention and describe the collateral as well.
  • Severability Clause: The severability clause is used to state that the terms of a contract are independent of each other. Therefore, if one condition of the contract is deemed unenforceable by a court that would not render all conditions unenforceable.
  • Entire Agreement Clause: The entire agreement clause is used to ensure that the final agreement supersedes any agreements previously made in negotiations.
  • Payment Terms: The loan agreement will outline the terms of repayment. This could include ways in which the loan will be paid such as on demand, in installments or a as a lump sum, as well as amounts and timeline of repayment.
  • Method of Payment: The loan agreement should also mention the method of repayment such as through a check or cash. Often some loans use automatic repayments. If the loan requires such as for automatic withdrawals from a checking account then payment authorization statement would also be included.
  • Dispute Resolution: The dispute resolution clause contains information on how potential disputes will be mediated and/or settled.
  • Default and Late Payments: In the scenario where the borrower is late in making payments or defaults, the loan agreement contains details on consequences and penalties as well as remedies.
  • Terms of Loans: One section is generally dedicated to outlining the terms of the loans and the options to change the terms of the loan such as refinancing or negotiating the interest rate later on.
  • Penalties: Often lenders want the loan spread over a longer period to earn interest. If the borrower pays back the loan in a lump sum, there might be penalties. This section discusses the penalties for paying back the loan early, if applicable.
  • Mandatory Arbitration : Mandatory arbitration clause is widely used by lending institutions in their loan contracts because it can prevent one from spending money in court. Arbitration puts the final decision in the hands of one person in arbitration cases. Generally, since lenders have a legal counsel and borrowers do not, this is beneficial for the lenders to do.
  • Usury and Predatory Protections: Several federal and state laws protect consumers from predatory and usury loan tactics that might be used by lenders. These can be added to the loan agreement.
  • Entire Agreement: This precludes any party form claiming that other agreements exist in addition to the loan agreement. This could state something similar to this, Entire This document constitutes the entire agreement of the parties. No representations or promises have been made except those that are set out in this agreement. This agreement may not be modified or terminated except in writing signed by the parties."
  • Signatures: Signatures from both the lender and borrower, along with the date of signing are required for the contract to be legally enforceable.

Here is more on elements of loan agreements.

Can I Write My Own Loan Contract?

Generally, people consult loans lawyers to draft loan contracts. However, you can write your own loan contract using free templates and guidance. It is still advisable to consult a lawyer who understands the national, state and local laws that would apply.

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