Loan agreement: tips and sample agreement

1. What is a loan agreement?

A loan agreement defines the conditions under which an individual (lender) surrenders the use of a particular sum of money or item to another individual (borrower).

The money (or item) must be returned in the same quantity and of the same kind at a time specified in advance. The loan may be interest-free or interest-bearing as well as against or without security (collateral).

2. Loan agreement: what are the advantages?

Loans between private individuals are very common. The lending of money to friends or family members is often a simple and cheap alternative to consumer credits from professional lenders.

This kind of loan is often agreed informally, i.e. verbally. After all, the lender wants to help a friend or relative out of their current financial difficulties as quickly as possible. However, money and friendships don't usually mix.

If a borrower breaks the verbal arrangement or even denies ever having received a loan, this puts the lender in a predicament. This is because it is the lender who carries the burden of proof should the issue be taken to court.

It is therefore strongly recommended that verbal arrangements be formally set out in writing in a loan agreement.

3. What is included in the loan agreement?

A loan agreement should stipulate, among other things, the sum of the loan, the repayment arrangements as well as interest and collateral, if applicable. Each party receives a copy bearing the original signatures. If the money is paid out in cash, the lender should ask for a signed receipt.