A personal loan agreement is a written contract document, indicating the terms and conditions that both the lender and borrower have agreed upon. Usually, this is a loan between relatives or friends. Personal loans are usually unsecured, but the agreement helps to formalize the loan.
The personal loan agreement consists of the date when the loan was borrowed, the loan payment date as agreed, the amount involved, signatures for both parties, the interest rate, and any other relevant information about the loan. This kind of loan is legally binding to protect either of the two parties in case of future disagreements.
The legal purpose of a personal loan agreement is to define the loan terms and conditions, that the lending and borrowing parties have agreed upon. It defines the responsibilities of each party and the period/duration of the contract.
When to consider a personal loan?
There are different situations when someone will choose to take a personal loan than a standard loan.
One of the reasons why one will consider getting a personal loan than a standard loan is when the loan is meant for general purposes. Personal loans have no restrictions on how to use money. Hence ideal for circumstances when the loan is to be used for different purposes.
Another reason why one will consider getting a personal loan than a standard loan is loan usage flexibility. This means that the borrower can change plans in the future, on how to use the loan.
The issue of collateral. Personal loans require no collateral or loan security. This is another reason that can lead to considering a personal loan than a standard loan.
Difference between standard and personal loan agreement?
A standard loan agreement demands or defines how the loan will be used, and that must be followed. For instance, a standard loan for buying a car cannot be used to pay school fees or any other bills. A personal loan agreement does not dictate how the borrower will use the money. The borrower determines what to do with the entire loan.
One of the conditions for obtaining a standard loan agreement is having or producing collateral that acts as loan security to pay the loan in case the borrower fails to meet the agreement. A personal loan agreement is an unsecured loan. It requires no collateral to obtain a personal loan.
Main contents of a Personal Loan.
Borrower Details: This is a basic part of a personal loan agreement. This includes the personal details of the borrower. They include full name, phone number, email, and address.
Lender details. : This includes the personal details of the lender. They include full name, phone number, email, and address.
Date: The date at which the loan transaction was done must be included in this agreement. Also, the date of the loan repayment should be indicated. This also shows the valid and agreed contract duration.
The amount: The total loan amount given to the borrower by the lender must be indicated. Also, the total payable amount by the borrower should be indicated.
Interest rate: The rate of interest is also indicated, that is if there is any
agreed interest. If no interest agreed on, then it should also be indicated.
Mode of repayment: The agreed mode of repayment is also indicated in the agreement. This involves the terms and conditions governing the loan repayment. Whether monthly installments or lump sum. For monthly or regular repayment, the amount of each installment should be indicated. It also indicates whether the payment is restricted to cash, cheque or any other method of payment.
Violation consequences: This includes the consequences agreed by both parties in case of late payments or any other violation by the borrower.
Guarantor details: A guarantor must be involved in the case of a personal loan. The details include full name, phone number, email, and address. The guarantor is responsible for paying the loan if the borrower violates the payment. The guarantor should also sign on the agreement.
Signatures: Both the lender and the borrower must indicate their signatures. This is a sign of acceptance upon the agreed terms and conditions by both parties.
Any other information: This is any other information that the lender or borrower would wish to include on the agreement. For instance, a witness can be included in the agreement.
Free Loan Agreement Templates
Can the lender of a personal loan charge interest?
Charging interest on personal loans is dependent on the lender’s wish. The lender may decide to charge interest or not. Usually, small personal loans to friends and relatives have no interest charges, but the big personal loans may attract charging interest. Personal loans obtained from a bank or any other financial organization must have interest charges.
How is interest charged?
How the interest is charged is agreed by both parties. The agreement can demand that the interest is paid first with the regular payments or last. The interest can also be charged as a fraction of the regular payments as agreed, while the remaining fraction repays the principal loan amount.
How should the payment schedule be?
In the case of relatives or friends’ Personal loan, the payment schedule should be scheduled in a way that matches the borrower’s income. But a general payment schedule should maintain consistent regular payments.
Is it necessary to notarize a personal loan agreement?
Notarizing a personal loan agreement is not a mandatory thing, but to make it more legally binding, it is good to notarize your personal loan agreement.
Is it necessary to have a witness in a personal loan agreement?
Having or involving a third party to act as a witness for a personal loan agreement is a good thing, but it is not mandatory to have one. Having a witness is an important thing, and he/she plays a great role in case of future misunderstandings.