A loan agreement is a comprehensive contract for lending money — more detailed than a promissory note. It covers not just repayment, but security, default, acceleration, and what happens if the borrower can't pay.
Loan agreement vs. promissory note
A promissory note is the promise to repay. A loan agreement is the full contract — it adds remedies, security interest, events of default, and the mechanics of what happens when things go wrong. For meaningful money, you want the full agreement.
What to nail down
- Principal, interest rate, and interest type — simple or compound.
- Repayment schedule — monthly, quarterly, annual, or lump sum at maturity.
- Loan term — 6, 12, 24, 36, or 60 months.
- Collateral / security interest — is the loan secured? If so, the agreement describes the collateral and gives the lender a security interest (record a UCC-1 where applicable).
- Prepayment penalty — can the borrower pay early, and at what cost?
Default, cure, and acceleration
Every loan agreement needs:
- Events of default — what counts as a default (missed payment, bankruptcy, insolvency).
- Cure period — how many days the borrower gets to fix a default (typically 10–30).
- Acceleration — the lender can demand the entire remaining balance on default.
- Remedies — collection, repossession of collateral, and attorney fees.
The usury limit
State law caps the interest you can charge. Exceeding it can make the loan unenforceable. Your drafter should flag the cap for your state — and some states (AK, CT, NY) are notably strict.
Make it legal
- Both parties sign (e-signature is fine).
- Disburse funds on the schedule the agreement spells out.
- If secured, record any UCC-1 where applicable.
Draft a formal, collateral-aware loan agreement for your state in about ten minutes.