Loan Agreement Template- A complete Guide (Free Download + AI Generator)

Your Guide to Secure Loan Contracts

A loan agreement is the backbone of any lending relationship—between friends and family, startups and investors, or businesses and banks. It spells out the amount, interest, fees, collateral, repayment schedule, and what happens if things go off-track. As part of our Financial Agreements resources, this guide will walk you through the essential terms, legal considerations, and best practices for drafting a contract that protects both lender and borrower.

A clear, well-structured agreement protects both sides: the lender knows how and when they’ll be repaid, and the borrower knows exactly what they owe and what rights they retain. In a credit market where balances are large and scrutiny is high, putting precise terms in writing is not optional—it’s essential.

Download the free Loan Agreement template or customize one with our AI Generator—then have a lawyer review before signing.

Table of Contents

1. What Is a Loan Agreement?

2. Why You Need One in 2025

3. Common Types of Loans

4. Key Terms Every Loan Agreement Should Include

5. Interest, Fees & Repayment Structures

6. Collateral & Security Interests (UCC Basics)

7. Legal Context: Usury, Disclosures, and E-Sign

8. Default, Remedies & Dispute Resolution

9. Tips for Drafting a Strong Loan Agreement

10. Checklist for a Loan Agreement

11. FAQs

1. What Is a Loan Agreement?

A loan agreement is a written contract that sets the terms for borrowing money—the amount advanced, the cost of credit, the timeline for repayment, and the rights and obligations of each party.

For simple, short-term loans, parties sometimes rely on a promissory note, an unconditional promise to pay a stated sum at a stated time. In more complex or longer-term deals, a full loan agreement is preferred because it covers covenants, security, events of default, and more.

2. Why Do You Need One in 2025?

Credit touches nearly every household and business—and the numbers are big.

Consumer credit outstanding is around $5 trillion according to the Federal Reserve’s G.19 release, and the New York Fed’s Quarterly Report on Household Debt and Credit shows total household debt near $18.39 trillion in Q2 2025.

When the stakes are this high, ambiguity is expensive. A tight agreement:

• Reduces misunderstandings about interest, fees, and repayment

• Anticipates change (late payments, refinancing, prepayment, or restructuring)

• Protects collateral and priority in case of competing claims

• Speeds enforcement if the borrower defaults

3. Common Types of Loans

• Personal loan (unsecured): Based on borrower credit; typically amortized with fixed payments.

• Secured loan: Backed by collateral (equipment, vehicle, securities, or real estate).

• Business term loan: Lump sum with a fixed maturity, often with financial covenants.

• Line of credit/revolver: Borrow, repay, and re-borrow up to a limit; interest accrues on drawn amounts.

• Bridge/balloon loan: Short-term, interest-only payments with principal due at maturity.

• Family/insider loan: Intra-family or shareholder loans; often aligned to IRS Applicable Federal Rates (AFR) to avoid imputed-interest and gift-tax issues.

4. Key Terms Every Loan Agreement Should Include

• Principal & purpose: Exact amount and permitted use of funds.

• Interest rate & accrual method: Fixed or variable; how interest is calculated (simple, 30/360, actual/365).

• Fees: Origination, late charges, prepayment premiums (if any).

• Repayment schedule: Amortizing vs. interest-only; due dates; grace periods.

• Security/collateral: What secures the loan; any third-party guarantees.

• Covenants: Financial (e.g., minimum liquidity) and affirmative/negative covenants (insurance, no additional liens).

• Representations & warranties: Authority to borrow, no conflicting liens, accurate financials.

• Default events: Non-payment, covenant breach, insolvency, cross-default, misrepresentation.

• Remedies: Acceleration, late fees, default interest, foreclosure on collateral, setoff.

• Governing law & venue: Which jurisdiction applies, and where disputes are resolved.

• Notices & communications: How notices are delivered (mail, email, e-signature).

• Amendments & waivers: Written-only; who must sign.

5. Interest, Fees & Repayment Structures

Getting the economics right up front prevents friction later.

5.1 Interest

Define whether the rate is fixed or variable. For variable rates, specify the benchmark (e.g., SOFR), reset frequency, floor/ceiling, and fallback if the benchmark is unavailable.

5.2 Fees

Be explicit about origination, commitment (for lines of credit), default interest, and late charges.

5.3 Repayment 

Common patterns include:

• Level-payment amortization (principal + interest each period)

• Interest-only with a balloon principal payment at maturity

• Seasonal/step schedules aligned to cash flows (common in agriculture or startups)

Include a prepayment clause (with or without premium) and whether prepayments reduce future installments or shorten the term.

6. Collateral & Security Interests (UCC Basics)

When a loan is secured, the lender’s rights in collateral are governed by UCC Article 9 (Secured Transactions). A security interest generally attaches when value is given, the debtor has rights in the collateral, and there’s an authenticated security agreement describing the collateral.

To perfect most interests (so you outrank later creditors and purchasers), the lender files a UCC-1 financing statement in the proper filing office. For real estate collateral, security is typically taken via a mortgage or deed of trust and perfected by recording in land records.

7. Legal Context: Usury, Disclosures, and E-Sign

• Usury & rate caps. Every state sets its own usury laws—maximum lawful interest or finance charges in certain contexts.

• Consumer disclosures. Truth in Lending (Regulation Z) requires standardized disclosures (APR, finance charges, payment schedule) for consumer-purpose credit.

• Electronic signatures. To sign digitally, rely on the ESIGN Act and state UETA enactments.

• Family loans & tax. For loans to relatives or owners, the IRS AFR sets minimum interest to avoid imputed income or deemed gifts.

8. Default, Remedies & Dispute Resolution

• Events of default: Missed payment; breach of covenant; cross-default to other debt; insolvency or bankruptcy; unauthorized transfer of collateral; false statements.

• Remedies: Acceleration of the loan; default interest; late charges; foreclosure or repossession of collateral; setoff against deposits.

• Mitigation & workouts: Allow amendments, forbearance, or temporary relief if both sides agree in writing.

• Dispute resolution: Choose venue, governing law, and if desired arbitration or mediation.

9. Tips for Drafting a Strong Loan Agreement

• Define everything important. Rates, fees, dates, grace periods, business days, and calculation methods.

• Be realistic on covenants. Tie ratios and reporting to what the borrower can deliver.

• Coordinate collateral. File UCC-1s correctly; schedule serial numbers or parcel IDs.

• Mind compliance. Include Reg Z disclosures where applicable.

• Plan for change. Set prepayment and refinancing rules.

• Use e-sign properly. Obtain consent and store records securely.

• Keep the paper trail. Retain all signed docs and notices.

10. Checklist for a Loan Agreement

• Parties’ legal names and signing authority

• Principal amount, purpose, and funding mechanics

• Interest rate and accrual method

• Payment schedule and prepayment terms

• Fees and charges

• Collateral and UCC/mortgage filings

• Guarantees (if any)

• Covenants and reporting requirements

• Events of default and remedies

• Governing law and venue

• Consumer disclosures (if applicable)

• E-sign compliance

• Exhibits: amortization schedule, collateral list, insurance requirements

Download the Full Checklist Here

11.FAQ’s

Q: Is a promissory note enough, or should I use a full loan agreement?
A: A promissory note can work for simple, short-term loans without collateral or complex terms. For larger amounts, secured loans, or deals with covenants and specific remedies, a full loan agreement provides far more protection and clarity for both sides.

Q: How do state interest-rate caps affect my loan?
A: Every state has usury laws limiting interest rates on certain loans, and violating them can void the agreement or trigger penalties. Some loans—such as federally regulated bank loans—may be exempt, so always check local statutes before setting a rate.

Q: Can I sign a loan agreement electronically?
A: Yes—if you follow the federal ESIGN Act and your state’s version of the Uniform Electronic Transactions Act (UETA). You must get the other party’s consent to e-sign and keep a secure, retrievable copy of the signed document.

Q: Do business loans require Truth in Lending disclosures?
A: Generally no—Regulation Z applies only to consumer-purpose loans. However, a few states have their own commercial lending disclosure laws, especially for small business financing, so local compliance checks are essential.

Q: What interest rate should I use for a family loan?
A: To avoid gift tax issues or IRS “imputed interest” rules, charge at least the Applicable Federal Rate (AFR) published monthly by the IRS. Document the rate, repayment schedule, and any collateral just as you would with an arm’s-length loan.

Q: What happens if the borrower defaults?
A: The agreement should define default events—like missed payments, covenant breaches, or insolvency—and outline remedies such as accelerating the balance, charging default interest, or enforcing collateral rights through foreclosure or repossession.

Disclaimer

This guide is for informational purposes only and does not constitute legal, tax, or financial advice. Laws vary by jurisdiction and transaction type. Consult a qualified attorney or tax professional.

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Protect your money and your relationship with a clear, professional loan agreement. Download the free template or customize one with our AI Generator—then ask a local attorney to review rates, disclosures, and collateral filings. For more contract templates and guides covering money deals of all sizes, explore our Financial Agreements category.