Loan agreement
A loan agreement is the legal document that sets the framework for a loan between two parties; lender and borrower. The loan agreement must safeguard the rights of both parties and ensure that all formalities surrounding the loan are documented and written down.
The loan agreement typically includes information such as:
- Parties to the loan
- The size of the loan
- Settlement of the loan
- The cost of the loan
- Term of the loan
A loan agreement is typically also referred to as a promissory note, and the two terms basically mean the same thing.
Why set up a loan agreement?
A loan agreement benefits both the lender and the borrower and serves as a security for both parties.
The security lies in the fact that both parties know all important aspects of the loan and thus also forms the basis for any doubts or disputes that may arise regarding the loan.
Disputes that can often arise around a loan are related to the cost of the loan, interest accrual and repayment issues. A good loan agreement ensures that this does not become a challenge.
The loan agreement also forms the basis for possible debtcollection, as a debt collection company or lawyer will often request the loan documents, including the loan agreement, to start collection proceedings if the borrower defaults on the loan during its term.
The loan agreement is also the framework for any questions from the tax authorities. If there is no valid documentation for a loan, such as a loan agreement, the tax authorities may question the loan - and whether the loan is in the nature of a loan or a gift.
If the loan has no loan agreement, or the loan agreement is designed so favorably for the lender that it is not considered to have the character of a loan, the tax authorities may choose to tax the loan as a gift.
That's why it's important to make a loan agreement.
Who makes the loan agreement?
In principle, both the borrower and lender can draft the loan agreement - or have their respective lawyers or attorneys do it.
But in the vast majority of cases, it is the lender who prepares and draws up the loan agreement, as it is typically the lender who sets the framework and terms for the loan - and thus also has wishes for interest rates, repayment, costs, etc.
In practice, the lender is often a bank - and thus it is often their standard loan agreement and terms that the loan is based on.
In some cases, the lender's lawyer may also draft the loan document, but this is often rarely necessary for standard loans with standard terms and conditions.
Download the free loan agreement template here
At Collectia, we help small and medium-sized businesses every day with debt collection, interest, debt and the like - and of course we always recommend that you draw up a loan agreement.
We've created a template that you can freely download, use and customize according to your needs.
You should carefully review and fill out the loan agreement template so that it is customized to the terms you want for the loan.
