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Your personal loan agreement is the document that contains everything you need to know about the deal you’re making with your lender, including your rights and responsibilities as well as theirs. It’s a fairly long and complex form, but breaking it down can make it easier to understand.

Here, take a closer look at personal loan agreements.

Personal Loan Agreements Defined

A personal loan agreement, as mentioned above, is a document that details exactly what is being agreed to on both sides of a personal loan — lender and borrower. At the very least, it will state how much money is being loaned and the terms and conditions of the borrower’s repayment responsibilities.

But what about a personal loan that is not with a traditional lender? Private lenders can be individuals or organizations that make loans to individuals, sometimes without the qualification requirements of traditional lending institutions. A private personal loan agreement is drafted as part of a private personal loan — one made between a private lender and a borrower.

Any personal loan agreement is a legally binding document, so it’s important to understand it in full before you apply your signature.

Key Elements of a Personal Loan Agreement

Say you’ve applied for a personal loan. If you qualify, you’ll move along to a personal loan agreement. Among the key elements of a personal loan agreement are:

•   Parties involved: The lender and borrower, including their legal names and addresses.

•   Loan amount: The amount of money being borrowed, also known as the principal.

•   Interest rate: This is typically expressed as an annual percentage rate (APR), which reflects the total cost of borrowing over a year.

•   Repayment terms: How and when the loan will be repaid, including the payment schedule, payment frequency, and loan term.

•   Default provisions: The consequences of failing to make payments, such as late fees and potential actions the lender can take. Also, you may want to be sure severability clauses are spelled out, stating what happens if one aspect of the agreement is deemed unenforceable.

•   Governing law: Specify which jurisdiction’s laws will govern the agreement in the event that there are disputes.

•   Signatures and date: These are needed from both the lender and borrower.

You might also include details on any loan collateral, late and early payment (prepayment) penalties, and guarantors or cosigners, as needed.

Why Is a Loan Agreement Needed?

A personal loan agreement is essentially a protective document. It protects both the lender and the borrower by laying out, in clear terms, exactly what is being agreed to. If either party fails to uphold the agreement, action can be taken — such as the lender seizing any assets offered as collateral or sending the account to collections — both of which, obviously, would be bad for the borrower.

But the document works both ways. Lenders, too, are subject to lender liability and can be taken to court if they fail to uphold their end of the loan agreement. Although these cases are far less common than borrower default, the loan agreement is a document that can be used for the borrower’s protection as well.

How to Write a Personal Loan Agreement in 5 Steps

Here are the usual steps to writing a personal loan agreement.

1. Decide Whether to DIY It or Hire a Lawyer

Loan paperwork is often created by the lending institution. For private loans, depending on the specifics of your loan and situation, you could write up a simple agreement by hand or draft it on your computer and then print it out for signing, if you are working toward a private loan. Or you might download a template from a reputable site, which can be a popular option. These are often free or are sometimes available for a small fee.

However, if the loan is complicated or you don’t want to handle the agreement yourself, you could look into hiring a lawyer to draw up the paperwork. Either way, a personal loan agreement will be a legally binding arrangement. Hiring a lawyer will likely be a costlier proposition.

2. Gather the Necessary Personal Details

You will need the legal names and addresses of both parties. This ensures the lender can’t ask you for anything beyond the borrowed principal (plus interest, which will also be listed).

3. Agree to and Spell Out the Loan Terms

The loan agreement should list the payments that will be expected each month and the expected date of the conclusion of the loan term.

The interest rate for the personal loan should also be on the personal loan agreement, likely expressed as an APR, which shows what percentage of the loan principal you’ll end up paying back in the course of one year including interest and any additional fees that may be packaged into the loan.

The interest rate will vary based on your credit score and other financial factors. If you have decent credit, you’ll likely be able to qualify for a personal loan. But generally speaking, the higher your score, the lower your rate.

Recommended: Personal Loan Calculator

4. List Payment and Legal Details

A personal loan agreement should also include the following, as noted above:

•   The loan agreement may list which types of payment are acceptable, such as check, bank transfer, or credit card.

•   The personal loan contract should also list specific repayment conditions, including when payment is due and whether or not additional principal can be applied without penalty.

•   A complete personal loan agreement should include details on how any disputes will be handled between the parties involved.

•   Some personal loan documents may include the option to change your loan’s term (the period over which the loan is repaid).

•   Personal loan contracts in the United States should stipulate which state’s laws will be used to govern and interpret the agreement if the borrower lives in a different state than the lender is headquartered.

•   Severability is a clause that states that even if one part of a contract is found to be unenforceable or otherwise rendered null and void, the remainder of the agreement will still hold.

•   Penalties associated with the personal loan, such as any late fees that may be assessed, at what point the loan will go into arrears or default, or other scenarios, should be listed in the contract as well.

5. Sign the Document

Finally, the contract for loaning money must be signed by the borrower and the lender in order to be made legally binding.

Recommended: Comparing Personal Loans vs Business Loans

Other Personal Loan Documents

Along with the signed personal loan agreement, other typical personal loan requirements include the following:

Proof of Identity

Your driver’s license or some equivalent form of photo ID will likely be necessary in order to verify your identity.

Income Verification

Lenders will consider your income when qualifying you for a loan — after all, they have good reason to be interested in whether or not you’ll be able to repay the debt. Along with asking you to list your annual income, verifying documents such as tax returns may also be required.

Proof of Address

In order to prove your residence, and therefore eligibility for any type of personal loan, you may need to provide utility statements, bank statements, or other official documents.

The Takeaway

If you’re considering a personal loan, reading the loan agreement in depth is a good way to understand for sure what you’re agreeing to. That loan agreement will contain many details about funds borrowed and how they will be repaid, and it serves to protect both the lender and the borrower.

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FAQ

Does a personal loan agreement need to be notarized?

No, a personal loan agreement does not need to be notarized to be legally binding — it simply needs to be signed by each party to the agreement.

What is a private personal loan agreement?

A private personal loan agreement is the binding legal contract between a borrower and a private lender for a personal loan.

Why do you need a loan agreement?

The personal loan agreement serves to outline the specific terms of the loan and protect both parties in case either fails to uphold the agreement.

Can a personal loan agreement be legally enforced?

Yes, a written and signed agreement for a loan can be legally enforced. It’s a binding contract.

What happens if a borrower defaults on a personal loan agreement?

If a borrower defaults on a personal loan, they will face negative impacts to their credit score, potential legal action from the lender, and they might find that their account is turned over to collections. They might also be charged late fees and a higher interest rate on the remaining balance due.

Photo credit: iStock/Chaay_Tee

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SOPL-Q225-035

When a trader issues a buy or sell order, that’s the trade date. The settlement date, which is when the security legally changes hands, is generally one day later.

The period of time between the trade date (designated as T) and the settlement date can vary, depending on the security in question. Starting in 2017, that window was two days, or T+2. But in 2024 the SEC made a new rule that most trades should settle within one day, or T+1. Different securities are subject to different rules.

That’s why investors need to know the timing of the actual settlement date, as that’s when they officially own the security, which may impact other trading decisions.

What Is a Settlement Date in Investing?

The settlement date in investing refers to the date that an investor takes legal ownership of a given security. It’s the day that a transaction or trade is final, in other words. It’s like buying a car or house — the transaction process may take some time, but it’s not really final until the keys are handed over.

Since 2017, the basic settlement date for a transaction was two business days after the trade date. That changed in May of 2024, when the SEC decided to accelerate the settlement process to one business day.^[1]

Types of Settlement Dates

Depending on the type of security involved in a trade or transaction, settlement dates may vary. That said, you can generally expect a settlement date to be one business day following the sale or purchase of a stock, bond, or exchange-traded fund (ETF). This is sometimes referred to as “T+1,” meaning “trade date, plus one day” to settle.

However, some types of securities, like bonds, may require between one and three business days (T+3).

Note that the time to settle is the same whether you’re investing online or through a traditional brokerage.

Trade and Settlement Dates Explained

To recap, the trade date is the day that an investor actually executes a trade from their brokerage account — they decide to buy or sell a security, and go through the necessary steps to make the transaction. That day, say it’s a Tuesday, is the trade date.

Again, if you’re buying stock, it’ll take one business day for everything to settle. So, if you made the trade on Tuesday, the settlement date will probably be on Wednesday (one business day later).

These delays between the trade date and settlement date are built in, and there’s not much you can do to speed it up — it’s more or less how stock exchanges work.

Why Is There a Delay Between Trade and Settlement Dates?

Given modern technology, it seems reasonable to assume that everything should happen instantaneously. But settlement rules go back decades, to the creation of the Securities and Exchange Commission (SEC) in 1934, when all trading happened in person, and on paper.

Back then, a piece of paper representing shares of a security had to be in the possession of traders in order to prove they actually owned the shares of stock. Paper transactions sometimes took as long as five business days after the trade date, or T+5.

Recommended: A Brief History of the Stock Market

What Is the T+1 Rule?

The T+1 rule refers to the fact that it now takes one day for a trade to settle. For example, if a trade is executed on Tuesday, the settlement date will be Wednesday.

Note that weekends and holidays are excluded from the T+1 rule. That’s because in the U.S., stock exchanges are open from 9:30am to 4:00pm Eastern time Monday through Friday.

Before the T+1 rule took effect in 2024, the general rule for settlement dates was T+2.

What Investors Need to Know About T+1

The T+1 rule in settling applies to trading of stocks, and some mutual funds. Some bonds settle at T+1, T+2, or T+3.

Investors who plan on engaging in cash-account trading need to know about trade vs. settlement dates. Cash accounts are those in which investors trade stocks and ETFs only with money they actually have today.

Meanwhile, margin trading accounts allow investors to trade using borrowed money, or trade “on margin.”

An investor may notice two different numbers describing the cash balance in his or her brokerage account: the “settled” balance, and the “unsettled” balance. Settled cash refers to cash that currently sits in an account. Unsettled refers to cash that an investor is owed but won’t be available for a few days.

Are T+0, or Real-Time Settlement Dates Possible?

Market observers have called for the T+1 rule to be reevaluated, as the settlement process could be accelerated in order to improve trading conditions.

Clearinghouses — which serve as middlemen in financial markets, and ensure the transfer of a security goes through — successfully lobbied for the settlement process to be changed from two days to one. Before that, market volatility prompted greater scrutiny of regulations surrounding clearing and settlement. That included a lot of trading during the meme stock frenzies in 2020 and 2021.

Moving to T+0 (or real-time settlement) would need the approval of the SEC and collaboration with dozens of Wall Street stakeholders. But the real-time transactions made possible in the cryptocurrency market by blockchain technology have escalated chatter about modernizing securities markets.

Potential Violations of the Trade Date vs Settlement Date

Knowing the difference between trade date vs. settlement date can allow investors to avoid potentially costly trading violations.

The consequences of these violations could differ according to which brokerage an investor uses, but the general concept still applies. Violations all have one thing in common: They involve the attempted use of cash or shares that have yet to come under ownership in an investor’s account.

Cash-Liquidation Violation

To buy a security, most brokerages require investors to have enough settled cash in an account to cover the cost. Trying to buy securities with unsettled cash can lead to a cash-liquidation violation, as liquidating a security to pay for another requires settlement of the first transaction before the other can happen.

Let’s look at a hypothetical example: Say Mira wants to buy $1,000 worth of ABC stock. Mira doesn’t have any settled cash in her account, so she raises more than enough by selling $1,200 worth of XYZ stock she has. The next day, she buys the $1,000 worth of ABC she had wanted.

But because the sale of XYZ stock hadn’t settled yet, and Mira didn’t have the cash to cover the buy of ABC stock, a cash-liquidation violation occurred. Investors who face this kind of violation three times in one year can have their accounts restricted for up to 90 days.

Freeriding Violation

Freeriding violations occur when an investor buys stock using funds from a sale of the same stock.

For example, say Jay buys $1,000 of ABC stock on Tuesday. Jay doesn’t pay his brokerage the required amount to cover this order within the one-day settlement period. But then, on Thursday, after the trade would have settled, he tries to sell his shares of ABC stock, since they are now worth $1,100.

This would be a freeriding violation — Jay can’t sell shares he doesn’t yet own.

Incurring just one freeriding violation in a 12-month period can lead to an investor’s account being restricted.

Good-Faith Violation

Good-faith violations happen when an investor buys a security and sells it before the initial purchase has been paid for with settled funds. Only cash or proceeds from the sale of fully paid-for securities can be called “settled funds.”

Selling a position before having paid for it is called a “good-faith violation” because no good-faith effort was made on the part of the investor to deposit funds into the account before the settlement date.

For example, if an investor sells $1,000 worth of ABC stock on Tuesday morning, then buys $1,000 worth of XYZ stock on Tuesday afternoon, they would incur a good-faith violation (unless they had an additional $1,000 in their account that did not come from the unsettled sale of ABC).

With these examples in mind, it’s not hard for active traders to run into problems if they don’t understand cash-account trading rules, all of which derive from trade date vs. settlement date. Having adequate settled cash in an account can help avoid issues like these.

Settlement Date Risks

Given that a lag exists between the trade date and settlement date, there are risks for traders and investors to be aware of — namely, settlement risk, and credit risk.

Settlement Risk

Settlement risk has to do with one of the two parties in a transaction failing to come through on their end of the deal. For example, if someone agrees to buy a stock, but then does not pay for it after ownership has been transferred. In this case, the seller assumes the risk of losing their property and not receiving payment.

This tends to happen when trading on foreign exchanges, where time zones and differing regulations can come into play.

Credit Risk

Credit risk involves potential losses suffered due to a buyer failing to hold up their end of a deal. If a transaction is executed and the buyer’s funds are not transferred before the settlement date, there could be an interruption in the transaction, or it could be canceled altogether.

History of Settlement Dates

The SEC makes the rules regarding how stock markets operate, including trades, and even what a broker does in regard to retail investing. As such, the SEC is tasked with creating the clearance and settlement system — a power it was granted back in the mid-1970s.

Prior to the SEC’s involvement, exchanges and transfers of security ownership were left up to participants, with sellers delivering stock certificates through the mail or even by hand in exchange for payment. That could take a long time, and prices could move a lot, so the SEC came in and set the settlement date at five business days following the trade date.

But as technology has progressed, transactions have been able to execute much faster. In 1993, the SEC changed the settlement date to three business days, and in 2017, it was changed to two days. In 2024, it was officially made T+1.

The Takeaway

The trade date is the day an investor or trader books an order to buy or sell a security, and the settlement date is when the legal exchange of ownership actually happens. For many securities in financial markets, the T+1 rule now applies, meaning the settlement date is usually one business day after the trade date — not including weekends or holidays. An investor therefore will not legally own the security until the settlement date.

While there’s been chatter that the settlement process needs to speed up to real-time settlement, it’s still important for investors and traders to know these rules so they don’t make violations that lead to restricted trading or other penalties.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

What’s the difference between trade date and settlement date?

The trade date is when an investor initiates a buy or sell order, and the settlement date is when ownership of the underlying security is actually transferred. That now happens one business day after the trade date (also called T+1), owing to an SEC rule change in 2024.

Is the settlement date the issue date?

Typically, the settlement date and issue date are the same, as the settlement date is when a security actually exchanges hands. But there are times when the two can be different, concerning specific types of securities.

Why does it take one day to settle a trade?

The one-day lag between the trade date and settlement is designed to give a security’s seller time to gather and transfer documentation, and to give brokers time to clear funds needed for settlement.