How to Write Up a Personal Loan Agreement

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.

What is a personal loan agreement?

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.

How to write up a personal loan agreement

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.

What a personal loan agreement should include

If you’re going to create a personal loan agreement from the ground up, it should include the following information:

Legal names and address of both parties.
Names and address of the loan cosigner (if applicable).
Amount to be borrowed.
Date the loan is to be provided.
Repayment date.
Interest rate to be charged (if applicable).
Annual percentage rate (if applicable).
Payment terms (installments with dates, lump sum, etc.).
Method of payment (cash, e-transfer, etc.).
Penalties for late or nonpayment.
Collateral (if applicable).
Information on how disputes will be settled (if applicable).
Prepayment penalties (if applicable).
Signatures from all parties involved, including the date.
Signature from a witness representing both parties (if applicable).

How much interest can I charge on a personal loan?

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.

Example of a simple 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.

EXAMPLE PERSONAL LOAN AGREEMENT

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)

AND

Jason Yip of 123 Wedge St., Stouffville, ON, A9B 8C7 (the Lender)

Loan Amount & Interest

The Lender promises to loan $10,000 CAD to the Borrower on February 1, 2023.

Payment

This loan will be repaid in full, plus added interest of $1,000 ($11,000 total) on or by January 1, 2025, in cash or bank draft.
No additional interest or collateral will be charged on the loan.
At any time while not in default under this agreement, the Borrower may make lump sum payments to pay the outstanding balance, without penalty.

Default

If the Borrower defaults in the payment schedule under this agreement, then the Lender may declare the principal amount under this agreement to be in default. At that time, the full amount is due and payable immediately.

Governing Law

This agreement will be constructed in accordance with laws set in the Province of Ontario.

Costs

The Borrower will be liable for any costs and expenses, without limitation, incurred by the Lender to enforce this agreement as a result of default by the Borrower. These costs will be added to the principal amount and agreed interest. The total amount shall be due and paid immediately upon demand of the Lender.
List of costs (if applicable).

Amendments

This agreement can be amended or modified if agreed upon in writing by both the Borrower and Lender.

Entire Agreement

This agreement constitutes the entire agreement between the Borrower and Lender. No further items or provisions, verbal or otherwise, are part of this 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 _______________