Loan Agreement

What is a Loan Agreement?

A Loan Agreement is a document which records the terms and conditions of a loan made between individual persons or companies. For example, it usually includes information about who lent the money, who they lent it to, how much they lent, when it needs to be repaid, and how much interest will be charged.

A Loan Agreement can be used for a variety of different loan types. In order to document more basic lending arrangements, consider using a Promissory Note.

What are the different types of Loan Agreement?

There are many different kinds of Loan Agreements. These include:

• Loan Agreements between individual people.
• Loan Agreements between companies.
• Interest free loans.
• Loans that incur interest.
• Loans that are repayable in instalments (eg. every month).
• Loans that are repayable in a lump sum.
• Loans for personal use.
• Loans for business purposes.
• Loans that include guarantors. A guarantor is a person or entity that agrees to repay a loan if the original borrower fails to do so.
• Loans that require borrowers to provide security for the loan.

What is the most common type of Loan Agreement?

The most common type of Loan Agreement is between friends and family. For example, parents might lend money to their children to help them buy a car or a house.

However, commercial Loan Agreements (between businesses) are also very common in Australia.

What is the difference between a Loan Agreement and a Promissory Note?

A Loan Agreement sets out all of the terms of a loan, whereas a Promissory Note is effectively a promise to pay a sum of money. Therefore the documents can be quite similar in some cases, but in other cases they can be quite different.

A Loan Agreement generally includes more details than a promissory note does (such as interest rates or repayment schedules). A Loan Agreement is also more suitable for more complex or formal arrangements.

A Loan Agreement is usually signed by both parties whereas a promissory note might only be signed by the borrower.

Is it mandatory to have a Loan Agreement?

No, but it is recommended to use a written agreement to ensure that all of the agreed terms are understood by both parties. A written Loan Agreement also protects both parties and allows them to enforce their rights (for example, by going to court) if the other party does not comply with the agreement.

Many people think a written agreement is not necessary between friends and family as they never intend to sue each other. However, in reality a written Loan Agreement is a simple way to ensure that everyone is on the same page and there is no misunderstanding about how and when the money should be repaid.

Who can enter into a Loan Agreement?

The two main parties to a Loan Agreement are the lender and the borrower. However, it is possible for there to be multiple lenders, and/or multiple borrowers. For example, two parents might lend money to one of their adult children, and that child's spouse.

In addition, some Loan Agreements also include one or more guarantors. A guarantor is a person or entity that agrees to repay a loan if the original borrower fails to do so.

All of the parties under a Loan Agreement (lenders, borrowers and guarantors) can be individual people, or can be companies or other legal entities.

What has to be done once a Loan Agreement is ready?

All parties, including the borrowers, lenders and any guarantors (if applicable) should review the Loan Agreement and make sure they are happy with the terms. Once all parties have approved it, they can sign the agreement in the relevant space, and the agreement can be dated.

If individuals are having their signatures witness, they should ensure that the witness is an independent adult person (over the age of 18).

All parties should keep a copy of the fully signed Loan Agreement for their own records.

Is it necessary to have witnesses for a Loan Agreement?

No, witnesses are not mandatory for a Loan Agreement, but they are useful for evidentiary purposes. If there is ever a dispute over the Loan Agreement, witnesses can help to prove that each party's signature is valid.

Witnesses should be independent adults (aged over 18), who have the mental capacity to understand what they are doing. They should not be related to one of the parties.

How does security work in a Loan Agreement?

In some Loan Agreements, the lender requires the borrower to provide security (also referred to as collateral) for the loan. This security is something of value that the borrower offers to the lender as some protection in case the borrower defaults on the loan.

If the borrower fails to comply with their repayment obligations, then the lender may seize the security to cover the debt.

If the borrower is providing security for the loan, then the lender may need to take further steps to rely on that security such as registering it on the Personal Property Securities Register. The parties may also wish to prepare a Security Agreement in relation to the loan security.

What must a Loan Agreement contain?

The following details need to be included in a Loan Agreement:

• Loan amount: the amount of money that the lender is lending to the borrower.
• Names of the parties: the full legal names of all parties including the lender(s), the borrower(s) and any guarantor(s).
• Loan date: the date that the money is being lent to the borrower.
• Interest rate: the rate of interest that will apply to the loan (if applicable).
• Repayment schedule: details of when the loan should be repaid and whether it should be repaid in instalments (eg. every month) or as a lump sum.

The following details can be included in some (but not all) Loan Agreements:

• Default interest rate: a higher interest rate that might apply if the borrower defaults on their repayment obligations.
• Security/collateral: details of any items of value that the borrower might be providing to the lender as security for the loan.

Which laws are applicable to a Loan Agreement?

A Loan Agreement is subject to the broad principles of contract law.

Where the Borrower has provided security, Lenders may wish to 'perfect' that security in accordance with the provisions of the Personal Property Securities Act 2009 (Commonwealth).

In some cases, if a loan deals with complex matters, the note may be deemed a complex financial product and may fall under the Corporations Act 2001 (Commonwealth) meaning that additional legal obligations may apply.

If a Lender is a company, and the Loan is being provided to a shareholder of that company, parties should be aware of division 7A of the Income Tax Assessment Act 1936 (Commonwealth). Where the parties believe that division 7A applies to the Loan, they may wish to use an alternative agreement – the Division 7A Loan Agreement.

If the Lender is in the business of providing loans, the provision of the National Credit Code under the National Consumer Credit Protection Act 2009 (Commonwealth) may apply. Lenders should review whether the provisions of that Act apply to their lending activities and ensure that they are in compliance with the rules that apply to Australian credit licence holders by tailoring this agreement accordingly.

If in doubt, the parties should seek legal advice.

How to modify the template?

You fill out a form. The document is created before your eyes as you respond to the questions.

At the end, you receive it in Word and PDF formats. You can modify it and reuse it.