The Ultimate Loan Agreement Guide

Key Takeaways

• A Loan Agreement is a legally binding contract that outlines repayment terms, protections, and obligations for both lender and borrower.

• This Agreement helps prevent disputes, provides proof of debt, and ensures clear legal recourse if issues arise.

• Loan Agreements are used in personal, business, and family lending, with variations like promissory notes, personal loans, and auto loans.

• A Loan Agreement should include essential details such as party information, loan terms, interest rates, repayment schedules, collateral, penalties, and signatures.

• Having a Loan Agreement commissioned by a notary adds enforceability, identity verification, and legal credibility.
• Book an online notary appointment with NotaryPro to commission your Loan Agreement quickly and securely.

Borrowing or lending money may seem simple, but without proper documentation, like a Loan Agreement, it can cause disputes and financial losses. A Loan Agreement fosters transparency, protects both parties in the Agreement, and ensures everyone fully understands their rights and obligations.

In this guide, we’ll walk you through the essentials of Loan Agreements and how to make yours clear and enforceable.

What is a Loan Agreement?

A Loan Agreement is a formal, legally binding document between a lender (or creditor) and a borrower. It outlines the terms, conditions, and obligations of borrowing money, ensuring that both parties clearly understand their rights and responsibilities. It can also specify whether a loan is secured or unsecured. 

Loan Agreements are also commonly referred to as:

• Lending Agreements
• Loan Contracts

Key Features of a Loan Agreement

• Proof of debt: Provides written confirmation of money borrowed, which can be used later if collections or legal action are needed.
  
• Clear terms: Lays out the loan amount, interest rate, repayment schedule, and any collateral or security involved.
  
• Repayment penalties: Details the consequences of late or missed payments, helping to encourage timely repayment.
  
• Legal protection: Functions as a binding Contract that safeguards both the lender and borrower in case of default.
  
• Dispute resolution: Provides guidance on how conflicts or disagreements should be handled between both parties.

The Importance of a Loan Agreement

A Loan Agreement is a safeguard for both the lender and the borrower. While verbal agreements may sometimes be considered legally binding, they are notoriously difficult to prove or enforce. A written Loan Agreement eliminates ambiguity by clearly documenting the terms both parties have agreed to.

Having a formal Agreement in place protects the lender, providing evidence of the debt, repayment obligations, and consequences if a borrower defaults. At the same time, it protects the borrower by ensuring transparency around repayment schedules, interest charges, and legal rights, preventing unexpected demands.

When Can You Use a Loan Agreement?

Loan Agreements can be helpful in a variety of personal and business financial situations. Common scenarios where a Loan Agreement can be useful include:

• Business-to-Business (B2B) Loans

A Loan Agreement is useful when one company lends money to another. It ensures repayment terms, responsibilities, and protections are clearly outlined. For example, a financial institution might fund a startup, or one company may provide another with a short-term operational loan.

• Business-to-Individual Loans

When a business lends money to an individual, a Loan Agreement sets out interest rates, repayment schedules, and penalties for non-payment. This is common with personal loans from banks, credit unions, or other lenders. It’s also essential in real estate loans, when private lenders use Agreements to maintain compliance and clarify repayment terms.

• Individual-to-Individual Loans

Even loans between friends, family members, or acquaintances should be documented. While these arrangements often feel personal, they can lead to disputes if repayment expectations are unclear. A Loan Agreement helps confirm that the money is not a gift, but a financial obligation with specific repayment terms.

Types of Loan Agreements 

There are many different types of Loan Agreements, each designed for specific lending situations. Below are some of the most common:

• Auto Loan Agreement – Used when lending money to an individual or business for the purchase of a vehicle.
• Business Loan Agreement – Outlines the terms of money borrowed by a business, whether for day-to-day operations or investment purposes.
• Employee Loan Agreement – Created when an employer provides a loan to one of its employees.
• Family Loan Agreement – A formal lending arrangement between two or more family members.
• I Owe You (IOU) Agreement – A less formal document that simply acknowledges a debt owed from one party to another.
• Loan Extension Agreement – Extends the maturity date of an existing loan, typically used when a borrower is experiencing payment difficulties. Interest typically continues to accrue during this time.
• Payment Plan Agreement – Establishes a structured repayment schedule for borrowers to follow when repaying a loan.
• Personal Loan Agreement – A versatile Agreement for lending money to cover personal needs such as weddings, vacations, or home improvements.
• Promissory Note – A written promise to repay a debt. It’s legally binding but generally less detailed than a full Loan Contract, and more formal than an IOU.
• Simple Loan Agreement – A concise, one-page document that is still legally enforceable but far less detailed than a traditional Loan Agreement.

Information to Include in a Loan Agreement 

A well-drafted Loan Agreement should be clear, detailed, and include all the needed clauses to become a bona fide Contract. Here are the essential elements your Loan Agreement should include:

Party Information

• Full legal names of the lender and borrower
• Contact details, such as current addresses
• Clarification of whether either party is an individual or a business
• Details of a co-signer, if one is added to guarantee repayment

Note: A co-signer may be added if a borrower has limited or poor credit history. This person agrees to take responsibility for repayment if a borrower defaults, which provides additional security for the lender.

Loan Details

• The principal loan amount being borrowed
• The purpose of the loan
• The effective date of the Agreement
• The location or jurisdiction governing the loan (commonly the lender’s location; however, if tied to an asset purchase, the location of the asset may be used instead)
  

Interest and Fees

• The interest rate, whether fixed or variable
• Any additional charges (e.g., origination fees)
• Expression of costs as an Annual Percentage Rate (APR)
• Whether interest compounds and how it is calculated (e.g., annually)
  

Note: For larger loan amounts, lenders often apply interest and/or late fees to encourage timely repayment. Interest charges may have tax implications, so consider them carefully.

Repayment Terms

• Payment schedule (installments vs. lump sum)
• The final due date for full repayment
• Early repayment options and whether penalties apply
• Balloon payments or other special repayment structures
  

Collateral

• Any assets pledged to secure the loan (e.g., property, vehicle, equipment, jewelry)
• Conditions under which assets may be seized if a borrower defaults
• Insurance requirements, such as requiring coverage if the loan is for a vehicle purchase
  

Penalties and Default

• Late fees or interest increases for overdue payments
• Steps taken if a borrower defaults
• Legal remedies available to the lender

Note: Lenders may penalize missed payments by charging additional fees or raising the interest rate to offset risk and administrative burden.

Additional Clauses

• Severability clause (ensures the rest of the Contract remains valid if one part is unenforceable)
• Entire Agreement clause (confirms the Contract is the complete and final Agreement)
• Loan transfer or sale provisions (though uncommon in personal loans, the Agreement may allow the lender to sell the loan)
  

Signatures

• Signature of both lender and borrower
• Signature of any co-signer, if included
• Signature of a notary public for commissioning

Are Loan Agreements Legally Binding?

Yes, a Loan Agreement is legally binding — but only if certain elements are present to make the Contract valid and enforceable. These include:

• Offer and Acceptance: A lender extends an offer to provide funds under specific repayment terms, and a borrower formally accepts those terms.
  
• Consideration: Both parties exchange something of value. A borrower receives money, while a lender receives the promise of repayment (and potentially interest or late fees).
  
• Intention: Both sides must mutually agree to enter into a legally binding Contract, sometimes referred to as a “meeting of the minds.”
  
• Legality: The terms of the Agreement must comply with Canadian laws. A loan made for illegal purposes (for example, funding unlawful activities) would not be enforceable.
  
• Capacity: Both the lender and borrower must have the legal capacity to enter into an Agreement, meaning they are competent adults.

How to Enforce a Loan Agreement?

If a borrower fails to meet their repayment obligations, a lender has several options to enforce the Loan Agreement.

The process often begins with a Demand Letter, a formal written notice that reminds a borrower of their responsibility to repay. This letter typically outlines the amount owed and provides a deadline for payment.

If a borrower still does not comply, a lender may try to negotiate a new repayment plan. If that fails, a lender can pursue legal action, which may involve hiring a debt collection agency or filing a lawsuit.

Can I Cancel a Loan Agreement?

Cancelling a Loan Agreement can be challenging unless the Contract specifically allows it. If cancellation may be a possibility, it’s best to include a cancellation clause in the Agreement from the outset. 

For example:

“Cancellation: Either Party may cancel this Agreement within 5 days of signing, or as otherwise permitted by law, by providing written notice to the other Party. Upon cancellation, both Parties must promptly return what they have received from each other.”

Even without such a clause, specific laws, like the Consumer Protection Act, may grant you the right to withdraw from a Loan Contract. In most cases, this right is only available within a limited time frame.

What If I Can’t Cancel a Loan Agreement?

If cancellation isn’t possible, there are still several approaches you can consider to cancel the Agreement:

• Challenging the Contract’s validity – If the Agreement was fraudulent, misrepresented, or otherwise voidable, consult with a lawyer. They’ll help you explore whether the Contract can be set aside and how to recover funds.
  
• Negotiating a mutual termination – Both parties may negotiate to end the Agreement. If negotiations stall, consider hiring a mediator or arbitrator. They’ll act as a neutral third party who’ll guide you to reach a consensus or resolution.
  
• Transferring the loan obligation – In some cases, you may sell the asset tied to the loan (e.g., a financed vehicle). Doing so can help settle the debt and remove the ongoing responsibility of paying for it.

What Happens If a Borrower or Lender Dies Before Repaying the Loan?

If a borrower passes away before the loan is fully repaid, their remaining assets will be used to cover the outstanding debt. If a co-signer is listed on the Agreement, that individual becomes responsible for repayment.

If a lender dies before receiving full repayment, a borrower must continue paying the debt to the lender’s estate. In this case, the beneficiaries of the estate are entitled to collect the remaining balance.

For larger loan amounts, it’s wise to update your Last Will and Testament to clearly state how you want any unpaid loans to be handled after your death.

Signing a Loan Agreement

A Loan Agreement needs to be signed by both the lender and the borrower. For stronger enforceability, it’s best to sign it in front of a witness. A witness should be an independent adult (18+) who is not a family member and has no interest in the Contract. They’ll sign and date the Loan Agreement to confirm they observed the signing.

Having a notary or commissioner present is also an excellent way to verify the signatures and identities of everyone involved. Without a neutral witness or notary, a future dispute may boil down to one party’s word against the other’s.

Commissioning a Loan Agreement

During commissioning, each party swears or affirms that they agree to the Agreement’s terms in front of an official, like a notary. The notary confirms that each party is signing voluntarily and understands its terms, and witnesses the parties’ signatures.

Having your Loan Agreement commissioned by a notary or commissioner creates a record of proper execution and verifies identities and signatures. Commissioning also supports enforceability in court, giving judges confidence that the Agreement was signed knowingly and willingly. 

Commission Your Loan Agreement Online

You can book an online notary appointment with us to have your Loan Agreement commissioned seamlessly. The process takes under 7 minutes and can be done from anywhere with Wi-Fi, using your phone, tablet, or computer. Discover how easy it is to meet with a notary and commission documents from the comfort of your home or office.

Protect Yourself with the Right Loan Agreement

A Loan Agreement is a clear, enforceable Contract that protects both the lender and the borrower. By putting the terms in writing, you create transparency, reduce misunderstandings, and ensure that both parties have legal recourse should problems arise.

Whether the loan is personal, business-related, or between family members, a well-drafted Agreement builds trust and accountability from the beginning.

Need your Loan Agreement commissioned? Book an online notary appointment and have a licensed notary commission it in under 7 minutes!