Sample Format of Loan Agreement

Narendra Kumar

03 Sep, 2020

What is  Loan Agreement

Loans form an essential part of business transactions for both individuals and the organization. Obtaining a loan is crucial to the growth of the business, for personal goals, etc. The lender tries to make the best out of the capacity to give loan and earn interest over the same. Hence, a well-prepared Loan Agreement is essential to these transactions.

A Loan Agreement is an agreement between the lender and borrower stating the details of the principal amount provided as loan and its breakdown, the method of repayment and the interest to be paid, term period for lending, etc. This is a legally enforceable agreement to safeguard the rights of the lender in event of default by the borrower and protecting the borrower in relation to the terms of repayment.

The loan agreement in itself cannot be an assurance that the borrower shall pay back the amount in the manner as agreed upon, yet the legal validity of the document shall bring credibility to the lender’s claim. It is thus advisable that the Loan Agreement should contain a clause regarding the default in payment^[1] by the borrower.
Upon the documentation of the transaction, the borrower is assured that the interest to be paid on the principal amount and the time period mentioned for both disbursement and repayment stays checked and does not vary at any later stage.
Loan Agreement can be drawn for personal or commercial lending between two individual or an individual and corporation.

• The amount borrowed from friends, family, acquaintances
• The amount borrowed from a lender or an organization like (firm, partnership, company, banks, NBFC etc)
• The amount borrowed for starting or expanding business
• The amount borrowed for personal requirements like property or car etc
• The amount borrowed for Student Loan

In addition to the abovementioned, there are many more ways and circumstances in which loans may be obtained.

What are the elements of Loan Agreement?It is important to include certain information while drawing a Loan Agreement: 

• Complete details of the lender including the legal name and address
• Complete details of the borrower including the legal name and address
• The principal amount of the loan
• Term of lending
• Period of disbursement of loan
• Rate of interest
• Security provided by the borrower
• Repayment options and Schedule
• Prepayment options, if any provided
• Late charges or fee
• The procedure of amendments, if any allowed
• In case of more than 1 borrower, terms of jointly and severally liable
• Steps to be taken in event of default of the loan repayment as per the agreement
• Costs & Fees
• Any additional information about governing laws etc

Repayment Schedule

The Loan Agreement should set out a clear and proper repayment schedule so as to there is no ambiguity as to how and when the borrower will be required to repay the amount due to the lender which includes, the principal amount of the loan and the interest.
Types may be installment payments (monthly, quarterly), lump sum or ‘due on demand’ basis.