Simple Loan Agreement Template

Who can use a simple loan agreement?

1

Parents lending to children

A simple loan agreement suits a parent to child relationship. Where you may find a more complex agreement is needed, is where your child is living with a partner or if they are looking to get married. The reason being is that the equity in the property, required to pay off the loan, may be shared with their partner and as such there may not be enough money to settle the loan in full.

2

Brother to sister

Similar to parents, however there is an automatic assumption that money paid between siblings is presumed to be a loan and not a gift. A simple loan agreement makes the amount and expectations for repayment clear. This means that if the loan isn't repaid, the lender can pursue repayment through the Courts.

The risk is where your sibling gets married, as the equity in the property could be diluted, as it would be shared with their new partner. This is avoidable if the new partner is added to the loan agreement, to make them jointly liable for the repayment of the loan - much like a mortgage lender would do.

3

Friends

As Judge Rinder on ITV might say: "paper, I love paper evidence". He says this because a simple written, signed and witnessed loan agreement between friends is better than nothing, in the event the borrower fails to repay the loan to the lender. The borrower would struggle to argue they aren't liable to repay the loan, because the agreement is evidence of the understanding between the parties.

What is included in a Simple Loan Agreement?

Loan amount

The larger the sum of the loan, the more comprehensive the loan agreement should be, especially if the loan is to be repaid from the sale of a property.

Interest applied

Most informal loans don't have an interest rate applied to them, because the lender is a parent and simply wants the loan repaid. However, if there is a rate to be applied, then it can only be 0.1-2% on top of the current Bank of England Base rate. If the interest rate is higher, then you will require a more complex loan drafting, as the agreement falls under the Consumer Credit Act.

Interest is an Annual Percentage Rate (APR) and is chargeable on the unpaid loan.

Repayment

Is the loan to be repaid every month, year or on sale of a property/asset?

Default

This is the main reason you have the arrangement documented in agreement - if the borrower defaults on the repayment of the loan, then the lender can enforce the repayment using the loan agreement.

When is a simple loan agreement not a good idea?

Business loans

A simple business loan agreement doesn't exist and the risks to the lender are far greater. When a parent loans money to their child to buy a house, the parent knows they have an asset of value to claim against if their children don't pay the loan back. With property prices normally maintaining their value or going up, the risk that the borrowers won't have the money to repay the loan is lower.

A business loan doesn't offer the same low risk. A business needs funding to grow, however, what happens if it doesn't and the company goes into liquidation? The loan agreement will prove you are due to be repaid, but if there is no money to repay the loan (or not enough money) then the lender is out of pocket.

If you are lending to a business, then you should avoid a simple agreement and look for one that offers greater protections requiring the borrowers to give Personal Guarantees to personally repay the loan if the company goes into liquidation.

Business to consumer loans

Companies that offer loans to consumers can't use simple loan agreement templates. free or other, because they are required to provide additional information to the consumer. The obligations on a business are far greater than in a personal loan agreement between 2 consumers.