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What are loan agreements and what should they include?


A loan agreement is a complex legal document created to protect both parties within a loan, in most cases the lender will draft the agreement as they are the one who is lending the money. Understanding what is included within a loan agreement is essential as it can prevent you from falling into any legal troubles and losing money within your agreement. If you have never constructed a loan agreement then including all of the terms and conditions can be a daunting task. To protect yourself it is crucial you get help from an expert loan agreement solicitor so you understand exactly what your loan agreement includes to preventing issues in the future.

What is a Loan Agreement?

A loan agreement commonly known as a “facility agreement” is a legally binding document between you the lender and the borrower, they both set out terms on which the leader is to loan the money to the borrower on the agreed terms. 

What Should be Included in a Loan Agreement?

A well-written loan agreement should include the following points:

  1. The amount of money to be loaned – A well-written loan agreement should clearly specify the amount of money the borrower will be receiving. 
  1. The timeframe upon which the money must be paid back – Within the loan agreement, it should clearly state the amount of time upon which the borrower has to repay the loan to the lender. Ideally, the timeframe should not last more than five and a half years to ensure that the debt doesn’t become statute barred if you ever need to take legal action to recover your loan.
  1. The agreed method of repayment – Clear information of when you should receive your money back should be included within your loan agreement, this could wither be in monthly installments or in a single lump sum depending on what suits the lender the best. If you require payment via bank transfer, you can also specify the account details and that the borrower must set a standing order up.
  1. The consequences of late payment – There should be details within the loan agreement stating the consequences for late payment or no payment at all, for example, if the borrower fails to send the money on time and sends it 10 days later they shall receive whatever punishment is written in the agreement. Consequences can include that the whole loan amount becomes due immediately and that if the borrower is in default they are liable for legal fees.
  1. The amount of interest (if there is any) – If the lender themselves is wishing to add interest onto their loan agreement they must clearly specify the rate of interest within the loan agreement. It must also include the amount to which it has been calculated and also how it will be applied or paid if the borrower pays back the money early.
  1. Signatures – The agreement must be signed by both parties to show they both fully agree to the terms which have been set out. 
  1. Governing law – The agreement clearly specifies what jurisdiction it falls under (e.g. English Law, England and Wales). This will be important should legal proceedings ever be required.
  1. Any type of security to protect the lender – If the lender decides to have any security measure included within their loan they must include it within the loan agreement, this is normally an asset which is owned by the borrower.

What should I do before I make a loan?

If you are considering making a loan to a family member or to a close friend we recommend that you seek advice from a legal expert, this is to make sure you are following all of the current legislation. Seeking the help of a legal expert also prevents you from missing any essential steps in the long run that could prevent you from gaining your money back, or prevent you from sighing a bad loan agreement.

What is a secured loan?

A secured loan is a loan which is protected by putting a charge over the asset which is usually owned by the borrower, this acts as collateral should the other members of the agreement fail to pay the loan back. 

What types of loan security are there?

Depending on who you are loaning your money to it can change the security of your loan agreement, for example, if you are creating a loan agreement with a company, you can as the director, personally guarantee the payment obligations of the company under the loan agreement. This means the directors of the company can pay back the loan personally or you can go down the route of a debenture which is similar to a legal charge. 

For loans against an individual you can seize things such as assets like property, cars even saving or investment accounts that can be used as collateral if the borrower fails to pay their loan back on time.

Can I loan my money to family or friends?

It seems to become more and more popular to loan family and friends money these days, this is could be from helping them with a new piece of equipment for their work or could even vary to a new home. It is important to understand that this kind of loan to a family member or friend could fall within the provisions of the Consumer Credit Act 1974 (‘CCA’).

What do I need to do if the CCA applies to my loan?

If a loan is caught by the provisions of the CCA, you should check whether the lender needs authorisation from the Financial Conduct Authority to make the loan and ensure that the loan agreement complies with the regulations set out in the CCA.

Need help with your loan agreement?

If you require any additional information in relation to Loan Agreements or would like to discuss you legal circumstances further with Loan Agreement Solicitors then please get in touch at [email protected] or call us on 0330 127 8888 and our team will be more than happy to help.


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