Getting a personal loan? It’s not as simple as walking into a bank and asking for a check — there’s some paperwork involved.
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.
What Is a Private Personal Loan Agreement?
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, specifically, 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.
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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
Here are the usual steps to writing a personal loan agreement.
Decide Whether to DIY It or Hire a Lawyer
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. 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.
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).
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.
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List Payment and Legal Details
A personal loan agreement should also include the following:
• 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.
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.
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Does a Personal Loan Agreement Need to Be Notarized?
Personal loans are a type of contract, and contracts do not need to be notarized to be legally binding. All it needs is your signature. Be sure to read all the fine print in detail before you uncap that pen.
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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.
Getting a Personal Loan
Taking out a personal loan is a big financial responsibility, but it can also be a smart money move if you need to handle large, unexpected expenses at the last minute, or to consolidate existing debt. For someone who has bad credit, a small personal loan responsibly managed can be one way to bolster their credit score.
Just remember that all loans come at a price — interest charged — and considering the total amount you’ll pay back to the lender over time is important in order to have a full understanding of the cost of the loan.
For example, if you take out a $10,000 personal loan at a 7% interest rate to be repaid over a term of five years, you’ll pay back a total of $11,880.72, or an additional $1,880.72 in interest. That’s not including any origination fees, late fees, or prepayment penalties a lender might charge.
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.
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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.
Photo credit: iStock/Chaay_Tee
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This article is not intended to be legal advice. Please consult an attorney for advice.
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