It might go without saying, but a loan is an agreement by one party (a lender) to lend money to another (a borrower). They can be Term Loans (meaning they are repaid over a set period of time), an facility for drawdown, a Secured Loan, an Unsecured Loan, and more besides.
What is a loan agreement?
A loan agreement is a very complex document that can protect the two parties involved.
In most cases, the lender creates the loan agreement, which means the burden of including all of the terms for the agreement falls on the lending party. The purpose of a loan agreement is to detail what is being loaned and when the borrower has to pay it back as well as how.
The loan agreement has specific terms that detail exactly what is given and what is expected in return. Once it has been executed, it is essentially a promise to pay from the lender to the borrower.
Even if you think you may not need a loan agreement with a friend or family member, it is always a good idea to have a loan agreement in place, just to make sure there are no issues or disagreements over the terms later that could ruin a valuable relationship.
Often banking lawyers like me will call loan agreements Facility Agreements.
What makes a loan agreement enforceable?
For a loan agreement to be enforceable, it must be documented in writing and signed by both parties.
In addition to this, there are several components you need to include in a loan agreement:
Basic information
With every loan agreement, you need to have some basic information that is used to identify the parties that are agreeing to the terms.
You will have a section that details who the borrower is and who the lender is. In the borrower’s section, you will need to include all of the borrower’s information including full address.
Specific loan details
Once you have the information about the people involved in the loan agreement, you will need to outline the specifics surrounding the loan including the transaction information, payment information, and interest information.
In the transaction section, you will detail the exact amount that will be owed to the lender once the agreement has been executed. The amount will not include any interest that will accrue during the lifetime of the loan. You will also detail what the borrower is getting in return for this sum of money that they are promising to pay to the lender.
In the payment section, you will detail how the loan amount will be repaid, the frequency of the payments (e.g. monthly payments, due on demand, one lump sum, etc.), and information on the acceptable payment methods (e.g. cash, card, bank transfer, debit payments, etc.).
Security
A key point when acting for a Lender is to understand what security is available. Is a first or second charge against property being granted, or a debenture over a corporate borrower, or a personal guarantee by a director.
When property is involved, it is sensible as a lender to carry out some due diligence as well:
- Checking the title documents
- Carrying out searches to reveal any issues affecting the property
- Carrying out a valuation
While these things might seem excessive, particularly if the borrower is known to you, they are sensible to protect your position.
I work with a number of excellent property lawyers familiar with loan agreements and security over property, such as John McLean and Rebecca Cobbs.
Additional items
In addition to the main sections detailed above, you have the option of adding additional sections to address specific items as well as a section to make the validity of the document unquestionable.
When executing your loan agreement, you may want to include witnesses to help prove the validity of the document in case it is ever disputed.
Case Study 1
We recently acted for a non-institutional Lender which was funding the redevelopment of a Landmark site in Bromsgrove.
John McLean acted for the Lender on the property transaction, and Steven Mather acted on the banking/finance side.
We prepared the facility agreement, legal mortgage over 2 properties and associated board minutes. A top regional firm were on the other side of the matter.
Case Study 2
A semi-retired woman came to us asking for help. She was looking to lend £70k to a developer that she’d met a number of times and wanted it to be properly formalised.
With our involvement, we managed to agree a loan agreement, a second charge on a property and a personal guarantee – none of which she would have had without me being involved.
While there’s never any guarantees, particularly with a second charge on property, it put her in a great position were the borrower to ever default.
Loan Agreements Solicitor
As a solicitor, I draft many loan agreements each year. Enlisting my services for your loan agreement ensures:
- Plain English Advice
- Time – to understand your situation and all that you’re faced with
- Experience – effective advice on many different forms of loan agreements including loans to family or friends, bank loans, corporate and business loans, secured or unsecured loans, structured loans, disputes over loan agreements, employee loans and director loans
- Cost – fixed fees on all matters for your certainty
- Convenience – meetings by phone, video call or in person at a time to suit you
Get in touch with me for any questions you might have about drafting a loan agreement – I’ll be delighted to help.
