If you are lending or borrowing money, a written agreement can be essential to ensuring that you and the other party are on the same page (literally) about the loan’s terms. A loan agreement should address payment terms, due dates, interest, and what will happen if the loan is not repaid in time.
Components of a Typical Money Loan Agreement
Some components of a typical money loan agreement are:
- Principal. The principal is the amount of money being loaned.
- Term. What is the duration of the loan? The agreement will specify when the loan begins and the date by which it must be fully repaid.
- Interest. The interest rate of the loan will be specified in the agreement. The agreement will also specify how the interested will be calculated (e.g., simple or compounded at certain intervals) and if the rate is subject to variation.
- Repayment Schedule. The loan might be repayable in a lump-sum or in installments. Either way, the agreement will specify the understanding of the parties.
- Default. If the borrower fails to meet certain obligations specified in the agreement, including making payments as required, then the borrower will be in default. The agreement will specify the consequences of default, including possibly a higher interest rate (a “default interest rate”).