Guide to our Loan Agreement
Our Loan Agreement template is for when someone has made a loan or is wishing to make a loan.
It is ideally suited to loans between family members or friends.
This loan agreement incorporates various options, so it is appropriate whether:
- interest is being charged or not;
- the loan is repayable in full in one lump sum or over a period by instalments; and
- the borrower is a company or an individual.
This template presumes that:
- there is no security being provided to the lender for the loan; and
- there is no guarantor of the loan.
If these are not the case, then you may need one of Legalo’s other loan agreement templates that would better suit you.
Clauses in this Loan Agreement
Date – Insert just the year at this stage. Handwrite the rest of the date in the agreement once all the parties have signed it.
Party clauses – You will need to insert the names and addresses of party 1 (the lender) and party 2 (the borrower).
Choose which of the 2 options applies, depending on whether the loan has already been paid to the borrower or is about to be.
1. Interpretation – These are the definitions of the main terms used in the agreement.
- “Balance Sheet” – this uses a definition in the Companies Act 2006.
- “Event of Default” – this refers to the breaches of the agreement set out in clause 5 that trigger an early repayment of the loan.
- “Financial Year” – this uses a definition in the Companies Act.
- “the Lender” – the lender includes any party it assigns the benefit of the debt to.
- “the Loan” – insert the amount lent or to be lent.
- “Profit and Loss Account” – this uses a definition in the Companies Act.
2. Loan – Here complete the date of the loan’s being made if before the date of this agreement or choose the second option.
3. Repayment – Here either state (a) the number of months after which the loan must be repaid in full or (b) the number of instalments, the amount of each instalment, including the first (this allows you to deal with any fractions of pennies that would other wise result), the date when the first instalment is due and whether payable monthly, quarterly or on some other basis.
4. Interest – This clause presumes interest is being charged and, if there is default by the borrower, an additional rate of interest to reflect the lender’s increased risk. We have assumed a variable rate would apply, so in clauses 4.1 and 4.2 you need to fill in the rates that are to apply over, say, the Bank of England base rate. On line 3 of clause 4.1, choose which option applies – if the loan was made on a date before the agreement is signed then usually you would put that date here. On lines 4 and 5 of clause 4.1, fill in the option that applies regarding the timing of interest payments being due – normally this would be the same as the timing of instalments, if any, to repay the loan under clause 3.1. Clause 4.3 is optional – if interest is not paid on a regular basis, then you may like it to become compound interest (i.e. interest is then charged on the unpaid interest). If so, choose what period is to apply: normally this is tied in with the time an interest payment is due under clause 4.2.
5. Immediate repayment – If there is default by the borrower, the loan becomes repayable in full immediately in order to protect the lender’s rights. The clause lists various events of default. If the borrower is an individual and not a limited company, then change the following clauses:
- Clause 5.1.2 should read: “if an order is made, or the Borrower presents a petition, for the Borrower to be made bankrupt;”.
- Clause 5.1.7 should read: “if the Borrower is unable to pay its debts within the meaning of the Insolvency Act 1986 Section 268;”.
In addition if the borrower is an individual, consider deleting clause 5.1.4 if the loan is not being made for the purposes of the borrower’s business.
6. Covenants – This sets a number of rules the borrower must comply with while any part of the loan is outstanding, much of which is so that the lender is given early warning of possible problems if the borrower’s business is starting to struggle. If the borrower is an individual, consider deleting any that do not seem appropriate, e.g. clauses 6.1.1, 6.1.2 and 6.1.7 if the borrower does not run a business of his or her own (and amend clause 6.1.3 to read “not give any loan, guarantee or credit;”).
7. Assignment – The lender is permitted to assign (i.e. sell) the benefit of the debt owed to it over to another party. (To do this a deed of assignment of a debt would be needed.)