What Is a Loan Agreement?

A loan agreement is a legal document that specifies the terms of a debt repayment. It also regulates the parties’ contractual promises and outlines their responsibilities.


Typically, a witness is not required to sign this document; however, this can add extra protection for the lender. It can also be notarized for added security.


While each type of loan has its own set of unique details, there are certain components that are present in every agreement. These include the involved parties, their responsibilities and the terms of the transaction.

The borrower section of the document should detail all of the relevant information for the person or business that is borrowing money. This includes their full name, Social Security number and address. In the event that a guarantor is included in the agreement, this should also be noted here along with their contact information.

Other information included in this section may be the payment schedule, the interest rate and whether it is compounding or simple and collateral requirements if applicable. It is also common for lenders to require a personal guarantee from the borrower in case of default, which is also detailed here.

Finally, the borrower may be required to sign a covenant that prevents them from selling assets or making investments with their cash during the repayment period. This will ensure that their available funds are dedicated to repaying the debt, satisfying lenders.


The lender is the entity that gives the borrower resources in exchange for future payments. They must abide by state and federal consumer protection laws to ensure they do not make predatory or usury loan tactics. Federal consumer protection laws include the Truth in Lending Act, Real Estate Settlement Act and Homeowners Protection Act. The lender also must provide a reasonable interest repayment rate.

The loan agreement must specify information about the lender including name, address, Social Security number and phone number. It should also identify any guarantor if there is one. A clause regarding severability is also necessary. This means that if one portion of the contract is deemed unenforceable by a court, the rest remains valid.

The transaction information section should include the exact amount that is being lent, its duration and whether it is revolving or fixed. The lender must also clearly outline payment information, including when the payments are due and the method of payment. If the lender is requiring collateral, this should be outlined in this section too. The lender may also impose prepayment penalties, which should be detailed here.


A guarantor is someone who promises to pay off a debt if the primary borrower fails to meet their obligations. Guarantors are often required for loans such as mortgages and car loans. They may also be necessary for rental agreements, if the renter doesn’t have sufficient credit or income history.

A creditor can come after both the guarantor and primary borrower for unpaid debt, though laws vary from state to state. For instance, some states prevent creditors from going after a guarantor until they’ve exhausted all options with the primary borrower.

If the loan agreement requires collateral, there needs to be a section that lists all assets involved. This should include any warranties and guarantees, along with the value of those assets. The agreement should also specify whether those assets will be used for the duration of the loan, and whether they are unsecured or secured. This will help prevent any disputes or disagreements over the terms of the loan later on, if those assets are lost. This can also help lower the interest rates, as the guarantor will be able to get a better deal on their own.

Additional Terms and Conditions

Depending on the loan type, there may be additional provisions in the agreement. This is typically the case for loans that require collateral or a personal guarantee. It is also common to have a clause in the agreement that specifies that the parties will follow all applicable state and federal laws when making the loan.

The additional terms and conditions can include things like the method of repayment, interest rates, late fees, and other provisions that make the loan unique. It may also address how the agreement will be governed and which courts will hear any disputes that arise.

It can also state that if the borrower does not perform the obligations of the agreement, the lender can declare it in default. This declaration of default can be in addition to or instead of any other actions and remedies available to the lender. This clause can also specify that the lender will be entitled to attorney fees and other expenses incurred in enforcing this agreement. It can also include a statement that the interest rate will not exceed the maximum usury limit of the state in which the loan is made.

Breach of Agreement

A loan agreement contains a list of terms that the borrower must abide by. A breach of covenant, or an event of technical default, occurs when a borrower fails to adhere to one or more of these terms. The consequences of breaking a covenant vary depending on the specific terms and the severity of the breach.

For example, if the loan is secured by company shares that are restricted from being sold publicly, a breach of covenant could allow the lender to demand immediate repayment of the debt or even sell the shares to satisfy the debt. In addition, a lender can pursue legal action to recover the debt.

For borrowers that receive a notice of breach, it is important to act quickly and seek experienced legal advice. Renegotiation of terms, waivers, and/or refinancing can help to mitigate the impact. The lender can also impose legal sanctions such as garnishing wages or seizing assets, if the breach is severe and unremedied. In the worst cases, a lender can force liquidation of the company or enter into a Company Voluntary Arrangement (CVA). Regardless, it is crucial for borrowers to seek alternative financing sources before breaking a covenant.