The personal loan agreement template is a legal document that would be completed by a lender in agreement with a borrower to establish the terms and conditions of a monetary loan. This document is considered to be a contract and therefore the borrower shall be expected to abide by all terms, conditions and governing laws.
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Personal Loan Agreement Template
Use for Excel, OpenOffice, and Google Sheets
What to Include in a Personal Loan Contract?
A personal loan is a contractual agreement between two parties, known as the “lender” and “borrower.” The lender may be a bank or other formal credit entity, or an individual – but the loan contract will be legally binding in either case.
This lending contract must include several key provisions:
- Names of both borrower and lender, their complete addresses, and their signatures.
- The state where the loan has been made.
- The date of the contract.
- The total amount of the loan.
- The interest rate for the loan.
- The repayment schedule, and how repayments will be applied to interest and principle.
- The date by which loan repayment must be completed.
This contract may also require the signature of a guarantor, who acts as a repayment fallback should the primary borrower default. Enlisting a guarantor, even if not required by the lender, may improve the borrower’s creditworthiness, and might also lower the interest rate and ease the lending terms.
Difference between a Personal Loan and a Standard Loan?
Unlike student or mortgage loans, whose terms prescribe how funds may be spent, personal loan money may be used for a range of purposes.
Since personal loans are more flexible financial products, not tied to a particular purchase or purpose, they are often unsecured. This means that the debt is not tied to any real assets, like a home mortgage is to the house or car loan is to the vehicle. If a personal loan is to be secured with collateral, this should be specified in the contract.
Repayment Options for a Personal Loan
In general, the rate of interest is specified in annual compound terms. Loan payments are usually required on a monthly or weekly basis, though, so some calculation will be required to determine the total that is due in each installment.
Since interest compounds – or gets lumped together with the original loan amount, or principle – earlier loan payments tend to make less of a dent in the outstanding principle. As the weeks and months pass, these payments, provided they are all equal, will chip away at principle at a quickening rate. In any case, the contract should clearly specify how each installment will be applied to the debt balance. The standard is for repayments to go first to cover interest, and then to principle.
What happens if the borrower wants to expedite repayment? The contract should specify whether there will be any penalties imposed on ahead-of-schedule repayment. Since this is often considered to be in the interest of both borrower and lender, early repayment is often not penalized.
Repercussions for Defaulting on a Personal Loan
As with any other financial commitment, defaulting on a personal loan is bad news. Missed payments and defaults are usually reported to the credit bureaus, where they are treated as red flags that may follow the borrower for seven years or more.
In the event of default, the lender can enlist the services of a collections agency or seek redress with a legal claim in court. If this means legal fees or other collection expenses are incurred in the process, these too may be passed on to the borrower.
The loan contract may also allow for “acceleration,” which requires full repayment of the remaining balance immediately should the borrower default. If a guarantor is on the books, then this party may face a steep and immediate debt bill once the lender has exhausted efforts to collect from the borrower – a potentially ruinous development for a personal or business relationship.
For the borrower, it is always better to nip repayment issues in the bud before they spiral out of control. Since debt defaults are so harmful to lenders too, they have an incentive to try to work things out with the borrower. While borrowers should not bank of changing lending terms midway through repayment, it may still be possible to hash out some compromise to get things back on track.