A personal loan agreement outlines the terms under which one individual lends money to another; holding both parties legally accountable.
When one person is willing to lend money to another person, a personal loan agreement is often advised.
A personal loan agreement is similar to the contract you’d sign when getting a personal loan from a financial institution, but when it’s between two individuals, it’s typically a little less formal.
That said, a personal loan agreement offers protection to both parties if there’s ever a dispute, which is why having one is essential. Here’s how to write it up.
A personal loan agreement, sometimes referred to as a promissory note, is a legally binding contract between two parties.
Although not always used, a personal loan agreement is a helpful document when lending money to a friend or family member. If the expectation is that the money will be repaid, having a personal loan agreement will clearly outline the terms.
The main reason you’d want to have this type of contract in place is because it holds the lender and borrower accountable. With a clear agreement in writing, the lender isn’t left guessing about when the debt will be repaid. From the borrower’s perspective, the terms are clearly defined, so there’s no question about how the money will be delivered, or what’s expected during repayment.
As long as the repayment schedule is kept, both parties have nothing to worry about and their relationship is not affected. However, if the terms aren’t met, and the borrower defaults on the loan, the lender could take legal action.
Without a personal loan agreement in place, it would likely be difficult for the lender to take action against a borrower who breaks their word.
You can write up a personal loan agreement by hand, with pen and paper, or draft it on your computer. Once the document looks good, it can be printed out and signed by both parties.
Alternatively, if the circumstances of the loan are a bit complicated, or if you’re looking for things to be more formal, you could hire a lawyer to draft up the agreement.
Whether you go the do-it-yourself route or hire a professional, a personal loan agreement is legally binding in Canada.
Both parties should carefully review the agreement before signing.
If you’re going to create a personal loan agreement from the ground up, it should include the following information:
How much interest you can charge on a personal loan depends on how much the borrower is willing to accept and how much risk you’re taking on.
For example, if you’re worried about the creditworthiness of the individual, you may want to charge a higher interest rate. If you’re just trying to do a favor for a friend, you might charge very low or even zero interest.
Note that Canada’s criminal code does not allow personal loan interest rates to exceed 60% annually.
Instead of interest, some people ask for equity. This would usually only apply if you’re lending money to someone that’s looking to use the funds to build their business. If equity is part of your deal, it must be included in the personal loan agreement.
This example template is for informational purposes only. Before signing or asking someone to sign a personal loan agreement, be sure to consult a legal professional, and/or the laws in your province.
This loan agreement is dated January 1, 2023.
This is a personal loan agreement between:
Ritchie Ma of 555 Biggs St., Markham, ON, X1Y 2Z3 (the Borrower)
Jason Yip of 123 Wedge St., Stouffville, ON, A9B 8C7 (the Lender)
Loan Amount & Interest
Payment
Default
Governing Law
Costs
Amendments
Entire Agreement
In witness whereof, the parties are to sign below on January 1, 2023.
Signed, _______________ (Borrower), this __________ day of _______________
Signed, _______________ (Lender), this ____________ day of _______________
Signed, _______________ (Witness), this ___________ day of _______________
Barry Choi is a freelance personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and…
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