Loan Agreement
Loan agreement summary:
A loan agreement details the terms of a loan, and the rights and responsibilities of the lender and borrower.
Loan agreements are designed to protect the lender and the borrower.
A well-crafted loan agreement can help prevent confusion and disputes.
Loan agreement definition and meaning
A loan agreement spells out the terms of a loan and the rights and responsibilities of both the borrower and the lender. This agreement is a binding contract once signed by both parties.
The loan agreement should clearly outline what’s expected of the lender and the borrower, and is meant to prevent misunderstandings and disputes.
Key concept: A loan agreement spells out the details of a loan, including the lender’s and the borrower’s rights and responsibilities.
More about loan agreements
At one time, a handshake was enough to seal an agreement between two people. While this was a nice idea, a handshake left room for misunderstanding. A loan agreement is meant to remove potential misunderstandings by clearly and comprehensively spelling out each side’s rights and responsibilities.
Loan agreements go by many names, including:
Loan contracts
Financing agreements
Promissory notes
Credit agreements
No matter what it’s called, the purpose of a loan agreement is to make sure both parties know what’s expected of them. When each party signs the contract, both should clearly understand the role they’re expected to play.
Both the lender and the borrower rely on the loan agreement to protect them legally if the other fails to carry through on their end of the deal.
For example, let’s say your mortgage payment is due on the first but you pay on the fifth of the month. Your lender charges you a late fee, but your loan agreement says you have a 15-day grace period. Thanks to the loan agreement, you could ask for the late fee to be reversed.
Loan agreement: a comprehensive breakdown
Not all loan agreements are created equal. A strong loan agreement covers both the basics and the what-ifs. A well-written loan agreement includes:
Date the loan was provided
Whether there’s a co-borrower or co-signer
Loan amount
Interest rate
Repayment schedule
When the first payment is due
Loan term (how long the loan will last)
Penalty for late payments
Whether you’re securing the loan by providing collateral (something of value the lender can repossess and sell if you default on the loan)
A clear description of when a loan is considered in default
The annual percentage rate (APR), which could be higher than the interest rate
The total cost of the loan
Writing up a loan agreement should never be an afterthought. Once signed, it's legally binding. The time to examine a loan agreement with a fine-toothed comb is before you sign.
Loan Agreement FAQs
What do I do if I don't understand how a loan agreement is written?
Ask questions and keep asking them until you fully understand what's expected of you. If you don't like the way an agreement is written, ask for it to be rewritten using language that's easier to understand. Never sign something that's not fully clear to you.
Is a handshake agreement enforceable in court?
A handshake (or verbal) agreement may be enforceable in court. However, while specifics vary by state, all require certain kinds of contracts (such as real estate sales) to be in writing.
The problem with handshake agreements is that they're difficult to prove in court. It's typically your word against their word, and you can't know who the court will side with. For your protection, never loan or borrow money without a loan agreement signed by both parties, even if it’s a loan between friends or family members.
Where do I find the interest rate on my loan?
Your interest rate and other loan terms should be spelled out in your loan agreement. This is the document you signed when you got your loan, and the lender should have given you a copy or the opportunity to download one. If you can't find your loan rate, you can contact the lender to get the details.
For credit cards, the interest rate appears in a place called the Schumer Box on your statement. This is a text box, usually somewhere on the last couple of pages, where your annual percentage rate and other key details about costs are clearly displayed.
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