A loan agreement is the two-party contract behind a serious private loan: the lender's promise to fund, the borrower's promise to repay, and everything that protects each side in between, including interest, schedule, representations, optional collateral, and remedies on default.
Use it when a bare IOU is not enough: business loans, secured loans, and any loan large enough that you would sue over it. For simple family loans, a promissory note is often sufficient.
Secured or unsecured: the single biggest decision
An unsecured lender who wins a lawsuit still has to collect like any other creditor. A secured lender has a claim on a specific asset: if the borrower defaults, the collateral can be repossessed and sold under Article 9 of the Uniform Commercial Code. Securing a loan requires two steps this template supports: granting the security interest in the agreement, with the collateral described precisely, and perfecting it, usually by filing a UCC-1 financing statement with the secretary of state so the lender's claim beats later creditors.
Describe collateral like a title office would
"Business equipment" is a weak description; "Diedrich IR-12 roaster, serial DR-12-88451" is a strong one. Serial numbers, VINs, and locations make repossession and priority disputes clean.
The clauses that earn their place
- Amortized installments: a fixed monthly payment with a final maturity date leaves no room for "I thought I could pay later".
- Acceleration on default: after a missed payment and notice, the whole balance comes due, so the lender sues once instead of monthly.
- Representations: the borrower certifies their financial information was accurate, which becomes powerful evidence if it was not.
- Costs of collection: attorney fees and collection costs shift to the defaulting borrower where state law allows.
- Amendment in writing only: kills the later claim that someone verbally agreed to forgive payments.
Usury, licensing, and tax: the edges to respect
Three legal edges surround private lending. Usury laws cap interest rates, with limits varying by state and by whether the borrower is a business. Lender licensing laws in some states regulate people who make loans repeatedly or charge high rates, though one-off private loans are generally exempt. And the IRS Applicable Federal Rate sets a floor for related-party loans: charging less than the AFR on a sizable loan to family or to your own company can trigger imputed interest. None of this bites a typical arms-length private loan at a modest rate, but a licensed professional is the right call for unusual structures.
Real estate is different
A loan secured by real property involves a mortgage or deed of trust, recording requirements, and often foreclosure rules. Use a deed of trust with the note for real estate security rather than a general collateral clause.
Frequently asked questions
What is the difference between a loan agreement and a promissory note?
A note is a one-sided signed promise to pay; an agreement is a two-sided contract with representations, covenants, optional collateral, and remedies. Use the agreement when the loan is secured, business-related, or large enough that enforcement matters.
How do I secure the loan with collateral?
Select the secured option and describe the collateral precisely: make, model, serial number, location. To protect priority against other creditors, the lender should also file a UCC-1 financing statement with the state, which is a short standard form.
Can two businesses use this loan agreement?
Yes. Enter the company names as lender and borrower, and have authorized officers sign. Business-to-business loans often qualify for higher usury limits than consumer loans, but the cap still depends on the governing state.
What interest rate should I use?
A market-appropriate rate below your state's usury cap. For loans to related parties, at least the IRS Applicable Federal Rate avoids imputed-interest problems. Zero interest is allowed and the document adapts its wording.
What happens if the borrower defaults?
After a payment is 15 days late and written notice is given, the lender can accelerate the full balance, sue for it, recover collection costs where allowed, and, if the loan is secured, repossess and sell the collateral under UCC Article 9.