Personal Loan Agreement 

If you are hoping to create or expand a real estate business or other endeavor, you know that there can be a large financial barrier to entry. While real estate often yields a significant and worthwhile return on your investment, putting forward the initial funds to get started can be difficult. It is for this reason that many investors secure a personal loan to get their feet off the ground.  

In this article, we will walk you through how to navigate a personal loan agreement template, helping you establish the necessary legal framework you need to secure personal loans and fund your financial endeavors. 

What is a Personal Loan Agreement? 

Put simply, a personal loan agreement is a formal document that outlines the terms of a personal loan between two individuals (a borrower and a lender), including how much money is being borrowed and the plan for it to be paid back. A personal loan agreement also outlines the proposed interest rate for repayment and contingencies in case the borrower defaults. The entire agreement should ultimately conclude with signatures from both parties, representing a mutual agreement to its terms.  

A personal loan agreement is similar to a promissory note. However, promissory notes are simpler and less formal, including only the basic terms of repayment. 

Types of Personal Loans 

Personal loans can be categorized into several types, each with its own unique characteristics and benefits. Understanding these different types can help you choose the best option among various loan agreement templates for your financial needs. 

• Secured Personal Loans: These loans require collateral, such as a home or car, to secure the loan. Because the lender has a form of security, secured personal loans often come with lower interest rates and more favorable terms. This makes them an attractive option for borrowers who have valuable assets and are looking for a lower-cost loan payment. 

• Unsecured Personal Loans: Unlike secured loans, unsecured personal loans do not require any collateral. These loans are typically used for smaller loan amounts and may come with higher interest rates and stricter repayment terms due to the increased risk to the lender. They are a good option for those who do not have assets to use as collateral but need to borrow money. 

• Fixed-Rate Personal Loans: These loans have a fixed interest rate that remains the same throughout the loan term. This provides predictable monthly payments, making it easier for borrowers to budget their expenses. Fixed-rate personal loans are ideal for those who prefer stability and want to avoid the uncertainty of fluctuating interest rates. 

• Variable-Rate Personal Loans: These loans have an interest rate that can change over time based on market conditions. While they may offer lower interest rates initially, the rate can increase or decrease, which can affect your monthly payments. Variable-rate personal loans can be beneficial if you expect interest rates to remain low or decrease in the future. 

• Payday Loans: These are short-term loans with high interest rates, often used for emergency expenses. Due to their high cost, payday loans should be used with caution and only when absolutely necessary. They are designed to be repaid quickly, usually by your next payday, and can lead to a cycle of debt if not managed carefully. 

By understanding the different types of personal loans, you can make an informed decision when lending money or borrowing that best matches your financial situation and goals. 

When is a Personal Loan Agreement Used? 

In real estate, personal loan agreements are often used when a borrower is planning to make a big purchase or investment and needs a window of time before starting repayments. Because personal loan agreements can be catered to the needs of the borrower and the lender, this flexibility can allow different repayment schedules than might be offered by a traditional bank. 

For example, if a borrower is looking to make a time-sensitive investment in another property while they’re in the middle of flipping a house, securing a flexible and quick loan is imperative. Experienced real estate investors may take out a personal loan if they’re looking to expand their portfolios. 

A personal loan contract is also a way for new investors to enter the real estate industry. It’s worth noting, however, that taking out a loan is much riskier if you do not have an established real estate portfolio. In addition to the loan amount, borrowers are responsible for all accrued interest and will still be liable for the repayment schedule even if they know the person they are borrowing money from. For emerging investors, it will be imperative to follow best practices and invest your money intelligently so that you can pay your loans back in a timely manner.   

Who is Involved in a Personal Loan Agreement? 

There are only two parties involved in the personal loan agreement: the borrower and the lender. The lender is an individual rather than a bank or financial institution, often a friend or family member. A personal loan agreement between friends has its own benefits, such as the potential for trust between parties and close contact with the state of the investment.  

What is Included in a Personal Loan Agreement? 

A personal loan agreement pdf should be as clear and unambiguous as possible, as this document is enforceable by courts. It should first explicitly identify both parties. It should also include the amount of the loan, the interest rate that the borrower and lender have agreed to, and the loan’s maturity date.  

Beyond that, your personal loan agreement should include an outline discussing collateral, prepayments, and different events of default. Our template specifies a post-default interest rate of either 12% per annum compounded monthly or the maximum rate permitted by law, whichever is lower.   

Several additional legal provisions and contingencies must be outlined in the rest of the agreement. Perhaps most important is that both borrower and lender agree that their loan agreement is “construed in accordance” with the governing law in the state the loan is being enacted. It is important that both parties are aware of any state or local laws that may regulate the process of acquiring a personal loan.  

Personal Loan Agreement FAQs 

Is a personal loan agreement legally binding?

Yes – As long as it is signed by both parties and outlines clear terms, a personal loan agreement is legally binding and can be enforced in court if either party fails to uphold their responsibilities. 

Do personal loan agreements have to be notarized?

While it may not be legally required, notarizing a personal loan agreement can provide additional proof that both parties signed the contract willingly, adding another layer of legal protection. 

What are the benefits of a personal loan contract?

In a situation where you’re borrowing from a friend or family member, you may wonder what the point of writing up a loan agreement is in the first place. However, even if you have a personal relationship with the lender, it’s vital to draw up an enforceable loan contract. Here are just a few reasons why this is the case: 

• Clear Terms and Conditions: A loan contract outlines the specific terms and conditions of the loan, including the loan amount, interest rate, repayment schedule, and any fees or penalties. The involved parties may write in additional contingencies, including establishing how repaying the loan early will affect the interest accrued. This clarity ensures that both parties have a mutual understanding of their obligations, reducing the risk of confusion. 

• Protection for the Lender: By clearly stating the borrower’s obligations and the consequences of defaulting on the loan, a loan contract protects the lender. This legal document ensures that the lender has recourse if the borrower fails to meet their responsibilities, providing a sense of security. 

• Protection for the Borrower: A loan contract also safeguards the borrower by clearly defining the terms and conditions of the loan. This transparency allows the borrower to make informed decisions about their financial obligations and ensures they are aware of their rights and responsibilities. 

• Reduced Risk of Disputes: With a clear understanding of the loan terms, both parties are less likely to encounter disputes. A well-drafted loan contract can help prevent misunderstandings and provide a reference point if any issues arise during the loan term. 

• Increased Accountability: A loan contract increases accountability for both the lender and the borrower. By providing a detailed outline of their obligations and responsibilities, both parties are more likely to adhere to the agreed-upon terms, ensuring a smoother loan process. 

A loan contract is a crucial tool for anyone involved in lending or borrowing money. It provides clarity, protection, and accountability, making the loan process more transparent and reducing the risk of disputes. 

Is a personal loan agreement right for me?

We have already taken a look at the positives of a personal loan for those who wish to buy their first property or expand their portfolio. However, there are certain qualifiers that a borrower should consider before they pursue a personal loan.  

If your credit score is low, for instance, taking out any kind of loan can become risky to the lender. Although securing a personal loan may be easier than going the traditional route through a bank with strict requirements, the lender may still have stipulations and enforce a higher interest rate if you have lower or unestablished credit. Additionally, if you are already dealing with many debts and are living on a tight budget, a loan introduces additional monthly principal and interest payments that you may not be able to afford. Considering the high default interest rate, securing a personal loan may do more harm than good. 

On the other hand, if you are able to pay for something on your own without taking out a loan, there is no reason to go through the process of securing a personal loan and pay the interest fees. If you can get by making a big purchase without securing a loan, it will save you money in the long run.  

Conclusion 

If you are looking to secure a personal loan for your real estate or other endeavor, take advantage of Innago’s free printable personal loan agreement template, downloadable above. Do yourself a favor and make this important and essential step just a little bit easier so you can focus on building your business. 

  

Innago does not provide legal advice. This article is for educational purposes only and may not include the most up-to-date information. We recommend you consult with professional counsel if you have legal questions regarding your compliance with relevant laws.