Simple Loan Agreement Template
A simple loan agreement is a legal document confirming the payment of money should be returned. It helps to protect the interest of both parties involved and ensures a smooth repayment process.
An agreement between a company and an individual will be subject to general contract law; it should clearly and concisely outline the amount borrowed, the interest rate, and the repayment schedule.
Loans between family members do not require the same level of formality, but it's still advisable to have a written agreement to avoid misunderstandings.
For example, in the event of a disagreement about the loan's terms, the document provides a clear reference point for both parties to consult. This helps to avoid excuses like "you told me it was a gift."
Download a friendly loan agreement, free from hassle that is legally binding* in England & Wales.
- Instant download in Word and PDF format.
- Suitable for cash loans to friends/family.
- Legally binding.*
- Sign, witness and lend the money.
The templates will be attached to your confirmation email after payment. Please allow a couple of minutes for the email to arrive.
What is included in a loan agreement contract?
A legally binding document outlines the terms and conditions of a loan between a lender and a borrower.
To ensure a smooth repayment process and protect the interests of both parties, it must include certain key elements:
How much is being lent?
The larger the loan amount, the more comprehensive the agreement should be, especially if the loan is to be repaid by selling an asset like a car or a house.
If the loan is to buy a house, consider registering the loan against the property as a charge.
What interest is being applied?
Most informal loans don't have an interest rate applied because of the relationship between the lender and the borrower.
For example, most parents who loan money to their children only want the loan repaid with no added interest.
However, if there is an interest rate to be applied to the loan, it can only be 0.1-2% APR on top of the current Bank of England Base rate - currently 4.75%.
If the interest rate is higher, then you will require a more complex loan drafting, as the agreement falls under the Consumer Credit Act.
Interest is an Annual Percentage Rate (APR) chargeable on the unpaid loan.
How and when will the loan be repaid?
Is the loan to be repaid every month, year or on the sale of a property/asset?
What happens if the borrower doesn't repay the loan?
This is the main reason you have the agreement - if the borrower defaults on the loan repayment, the lender can enforce the repayment using the contract.
Any money Mum and Dad give you is assumed to be a gift
If you lend money to your children and expect to have the money paid back, then you need some form of loan contract because parents giving money to children is presumed a gift stated otherwise in writing.
Where there is no documented agreement or evidence, and the parents request the loan to be repaid, their children could argue that the loan was a gift.
This makes it difficult to enforce repayment, leading to financial strain and potentially damaging family relationships.
This also applies when parents loan their children money to buy with their partners. Read more - Is it a gift, or is it a loan?
By having a contract in place, parents can protect their financial interests and ensure that the loan is treated as a legally binding obligation.
Who can use a sample loan agreement?
Parents lending to their children
A simple loan agreement suits a parent-to-child relationship. You may find a more complex agreement is needed if your child is living with a partner or if they are looking to get married.
The reason is that the equity in the property required to pay off the loan may be shared with their partner, so there may not be enough money to settle the loan in full.
If a family relationship deteriorates, an agreement helps to protect the parent's money. In some cases, loans between parents and children could be subject to Inheritance Tax (IHT).
If a loan is not repaid before the lender dies, the outstanding amount might be included in their estate, therefore increasing the overall value of the estate and pushing it above the IHT threshold.
Other examples:
- Education - College or University tuition, living costs when away from the family home.
- Businesses - Money being lent to start up a new business or expand an existing one.
Siblings lending money
Helping your sibling with a property purchase is a kind gesture, but what happens further down the line? If your sibling gets married, the equity in the property could be diluted as it would be shared with their new partner.
This is avoidable if the new partner is added to the loan agreement to make them jointly liable for repayment - much like a mortgage lender would.
Similarly to where parents lend money to their children, siblings failing to repay loans could also damage family relationships.
Other examples:
- Properties - Lending some money to a sibling to help with the deposit on a property or renovation costs for home improvement.
- Emergencies - Money lent to cover unexpected expenses like car repairs or travel troubles.
Friends
Failure to repay a loan between friends can severely damage the friendship and cause a breach of trust.
As Judge Rinder on ITV might say, "I love paper evidence." He says this because a written, signed, and witnessed secured loan between friends is better than nothing if the borrower fails to repay the loan to the lender.
The borrower would struggle to argue they aren't liable to repay the loan because the agreement is evidence of the understanding between the parties.
Other examples:
- Holidays - Friends lending money to each other to cover the cost of a holiday abroad or a trip away.
- Weddings - To help soften the blow of excessive wedding costs, friends might offer financial help.
When is it not a good idea to get a personal loan agreement template?
Business loans
A simple business loan agreement doesn't exist, and the risks to the lender are far greater. When a parent loans money to their child to buy a house, the parent knows they have an asset of value to claim against if their children don't repay the loan.
With property prices generally maintaining their value or going up, the risk that the borrowers won't have the money to repay the loan is lower.
A business loan doesn't offer the same low risk. A business needs funding to grow, but what happens if it doesn't and the company liquidates?
The loan agreement will prove you are due to be repaid, but the lender is out of pocket if there is no money to repay the loan (or not enough).
Business owners might misrepresent the financial health of their company or provide false information about their business plans, leading to fraudulent activity and unethical management of the funds.
If you are lending to a business, you should avoid a simple agreement and look for one that offers greater protections, such as requiring the borrowers to give Personal Guarantees to repay the loan if the company goes into liquidation.
Example
An example of this would be a Ponzi scheme, a type of investment fraud where existing investors are usually paid with the funds of new investors, rather than from actual profits made by the business.
Eventually, the scheme collapses and leaves investors with significant losses because the company originally appeared to be successful and profitable to attract these investors.
If a lender is unaware of a Ponzi scheme and provides a loan, they might face significant financial losses. Once the scheme collapses, the lender will have difficulty recovering their funds.
Business-to-consumer loans
Companies that offer consumer loans can't use simple loan templates because they are required to provide additional information to the consumer. The obligations of a business are far greater than in loan agreements between two individuals.
What happens if the borrower defaults and doesn't repay the loan?
You'd need to enforce the agreement's terms, starting by:
- Informing the borrower of the default to the agreement.
- If the default is not remedied - make an application to the county court here - Make a court claim for money.
You'll need to provide evidence of the:
- Loan agreement.
- Transfer of the loan to the borrower.
- Breach/default of the borrower.
- Sum due to you under the loan agreement plus costs and interest.
The average cost of court claims
- Court Fees: The exact court fees will depend on the amount of the loan and the specific court involved. However, you can expect to pay court fees ranging from a few hundred to several thousand pounds.
- Legal Costs: If you choose to hire a solicitor to represent you in court, you will also need to consider their fees, which can vary significantly depending on the complexity of the case and the solicitor's experience. Again, this ranges from a few hundred to several thousand pounds.
The claim process in a nutshell
- Complete the claim form and submit it to the court.
- The claim form is served on the borrower, either personally or by post.
- The borrower has 14 days to respond, if they do not then you can obtain a default ruling.
- If the borrower defends the claim, a court hearing will be scheduled to determine the outcome of the case.
- If the court rules in your favour, you will be awarded a judgment.
- If the borrower refuses to comply with the ruling, you might need to obtain a County Court Judgment (CCJ).
From issuing the claim form to obtaining a ruling, this process can take several months depending on the case's complexity.
Alternative dispute resolution
- Mediation: A neutral third party helps the parties negotiate a settlement. This can be a more cost-effective and less stressful way to resolve a dispute.
- Arbitration: A more formal process than mediation, but still less expensive and time-consuming than going to court. An arbitrator will hear both sides of the case and make a binding decision.
Need a secured loan agreement?
Without a written agreement, it can be challenging to prove the terms of the loan, the intentions of the parties involved, and evidence of a default. This can lead to significant legal challenges and financial losses.
For example, if an interest rate was not explicitly agreed upon, disputes can arise over the amount owed and the calculation of the interest.
This means that the lender not only could lose out on potential interest earnings, but also the entire principal amount as well.
By having an agreement in place, you can:
- Ensure that the loan is treated as a legally binding obligation.
- Prevent misunderstandings and potential litigation.
- Have a clear record of the loan terms and repayment schedule.
If you need legal assistance with a loan agreement, our solicitor can provide expert guidance and support. Contact us today if you need any help.
What are the pros and cons of a simple loan agreement?
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A cash loan or bank transfer?
A loan is still a loan whether or not it is paid in cash or by bank transfer. The only issue with a cash loan is it isn't simple to prove the amount of the loan borrowed.
For example, a bank transfer is easily evidenced via a bank statement. Cash transactions are often not documented and a lot harder to evidence as you need to prove the borrower received the money.
In a dispute on a cash loan, both parties may provide conflicting accounts of the transaction details, making it challenging to determine the truth.
Not only that but if the borrower defaults on a cash loan, it's difficult to recover the funds as there's no paper trail to follow. In a bank transfer loan, it's generally easier to enforce the terms of a loan agreement in the event of a default.
You should loan money via a bank transfer whenever possible, especially if the loan funds a house purchase.
Bank transfers provide a clear and verifiable record of the transaction including a date, the amount, and parties involved.
Bank statements are often used in court as evidence to prove the existence of loans and the terms of an agreement.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
