What to Include in a Loan Agreement
Person-to-person loan agreements between two parties who know each other can be transacted in one of three ways:
- Verbal. There is nothing in writing
- Paper document. Can be on the back of a napkin or more formal using a pro-forma loan agreement template
- Online loan tracker. Digitally stored loan terms, including bank transfers, which are accessible by both parties for full transparency.
The Value of Documenting a Loan
Documented personal loan agreements aren’t just for lending institutions. For loans transacted between family or friends, documenting the loan can help solve these common issues:
- Forgetfulness. Spelling out the terms of the loan — including amount, interest rate and repayment schedule — can help everyone remember the same important information.
- Miscommunication. When everything Is written down, there Is less room for misunderstandings.
- Legality. The loan agreement can be used as proof in a court of law in the event of default.
The risks of not documenting a loan, even when made with friends or family, can be regrettable.
Fully 44% of people in a recent survey conducted by LendAmi shared that loans they have made with people they know were not paid back in full or at all.
What Needs to be Included in a Written Loan Agreement?
The key elements you should include in your written agreement are:
1 – The full names and addresses of both borrower and lender
2 – The amount of the loan
3 – The repayment terms including frequency and first payment date
Additional terms that are common to loan agreements include:
4 – Interest rate
6 – Collateral
7 – Other special terms such as late fees
The Lack of Loan Agreement Documentation is a HUGE Problem
Billions of dollars are transacted each year in person-to-person loans between friends and family but the vast majority are made verbally and not in writing. The biggest danger in transacting verbally is that these off the books loans are frequently not paid back. Unpaid loans results in hurt feelings, anger and distrust.
In our survey, 57% of lenders and 75% of borrowers are uncomfortable with friends & family loans and 19% of lenders and 6% of borrowers won’t lend or borrow again due to having had a bad experience.
For most people, simply documenting the loan using a loan agreement in writing, mitigates the fear and anxiety around personal lending and borrowing.
The Pitfalls of Written Loan Agreements
Detailing the loan in writing for both parties is an important first step to ensure a good outcome for both borrower and lender. However, written loan agreements do not 100% ensure that the lender will be paid back in full or on time. It also still requires the lender, in some cases, to request payment from the borrower which can result in those awkward, unwanted conversations.
The Best Loan Agreement Solution
Setting up custom loan terms and then using automatic bank transfers to fund and repay the loan are increasing in popularity as friends & family borrowers and lenders appreciate the value of these new mobile lending solutions. They make personal transactions a bit more professional.
LendAmi serves the increasingly growing person-to-person lending market by offering a mobile platform that allows people who know each other to document, fund, repay and track a loan.
A step above a simple written loan agreement, LendAmi offers the following benefits for its users:
- Custom loan terms that the borrower and lender agree to
- Ability to include an interest rate to the principal providing the lender extra incentive
- Bank transfers so that the lender can fund the loan – perfect for people who are not located near each other
- Reminders when payments are due alleviating the need of the lender to ask for them
- Automatic bank transfers so that the borrower can easily stay on top of their payments
- Online tracking of the loan for full transparency for both parties
- Downloadable loan agreement that can be signed, if wished
LendAmi also understands that, sometimes, loans do go off track due to unforeseen circumstances. That is why we also offer the flexibility for the lender to forgive payments or delay them until the borrower is ready to resume.