What is a loan agreement?

A loan agreement is a written contract between a lender and a borrower that sets out the loan amount, repayment schedule, interest rate, and what happens if repayments are missed.

Do I need a loan agreement for a loan to a friend or family member?

Yes. A written agreement protects the relationship by making the terms clear from the start. It reduces the risk of misunderstandings about repayment and prevents disputes later.

What should a loan agreement include?

It should cover the loan amount, interest rate (if any), repayment schedule, what happens if a payment is late, and whether any asset is offered as security.

What is an interest-free loan agreement?

It is a loan where no interest is charged. The agreement still needs to be in writing to confirm the amount, repayment terms, and what happens if the borrower does not pay.

What is collateral in a loan agreement?

Collateral is an asset (such as a car or property) that the borrower offers as security. If they fail to repay the loan, the lender can take the asset as repayment.

What happens if the borrower misses a repayment?

The loan agreement should describe the consequences — this might include a late fee, additional interest, or the lender having the right to demand full repayment immediately.

Can the borrower repay the loan early?

Yes, unless the agreement says otherwise. Most personal and business loan agreements allow early repayment. Some charge a small fee for doing so, which should be stated in the contract.

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