What Is a Lending Agreement?

A lending agreement or a loan agreement has interchangeable terms, like note payable, term loans, IOUs, and promissory notes. It is a binding agreement between the lender and borrower to legalize and formalize the loaning procedure. The document also contains associated terms and conditions, along with payment schedules. Loan agreements range from simple loan letters that detail basic information regarding the longevity of the loan and interest charges to more complex documents, including mortgage agreements. The content of the loan agreement depends on the purpose of the loan and the amount of money that a business needs to borrow. Each loan agreement and the provisions and conditions of repayment are all under the governing state and federal guidelines to prevent illegal and excessive interests when it comes to repayment. It guarantees that the interest rates are under legal and reasonable terms.

According to the statistical data from Statista regarding the approval of small business loans in the United States in the second quarter of 2021, alternative lenders have the highest approval share from small business loan applications as of June 2021, with a rating of 24.8 percent. Institutional lenders follow at a 23.8 percent acceptance rating, followed by credit unions at 20.5 percent. Small and big banks also lend to small businesses at 18.9 and 13.6 percent, respectively.

Components of a Lending Agreement

Since lending agreements are legally binding documents between lenders and borrowers, constructing a well-written and detailed agreement is necessary to communicate key provisions and statements. Different lending agreements follow standards from their organizations and sometimes can vary from one lending institution to another. However, there are fundamental elements that every lending agreement must contain to relay the terms and conditions of the arrangement. Below are the components essential to lending agreements with their respective descriptions.

Borrower and lender information: The first section contains general information about the lender and borrower that must be available in the lending agreement. The essential components of this section include the individual or business names of the lender and borrower, contact information, addresses, and social security numbers, as applicable in the document. Depending on the purpose of the loan, the lender or borrower in the agreement is a person or organization.Date of the agreement: The date of signing the agreement must be within the fine print. It can either be on the front page of the agreement or directly above the signature line for the signing purpose of the parties.Amount of loan: The loan amount indicates the amount of money a borrower is receiving from the lending body. It is also in the first paragraph of the agreement.Interest rate: Lenders implement interests to help compensate for the risk of lending a particular amount of money to borrowers. The interest that institutions or individuals use is in the expression of a percentage of the total loan amount, known as the principal, then added to the loaned amount of the borrower. The extra interest that the lender charges the borrower is right at the beginning of the agreement, and it can be instated or increased depending on the actions of the borrower. Lenders can also charge compound interest wherein the principal amount has accumulated interest in the past. As a result, the interest rate slightly increases over time.Contract length: The term of the lending agreement depends on the amortization schedule. The amortization schedule is the period that determines the borrower’s schedule of payments. It functions by dividing the total loan amount by the number of payments that the borrower completes for them to pay the amount in full. Each monthly payment has its interest rate. Most of the payments that a borrower makes in the earlier months go to the interest, while most payments go into the principal amount going later into the schedule. Unless the parties agree on early repayment penalties, the borrower must do everything in their ability to pay as the soonest possible time as it reduces the owed amount to the lender.Payment methods: The payment method section contains information about how the borrower plans to repay the lender. Payment methods can be in the form of a lump sum payment on a certain date at the end of the agreement terms. It can also be in regular payments over a specific amount of time, payments towards the interest, and payments to the principal amount and the interest. Repayment schedule: For repayment schedules, borrowers can choose between two types: demand and fixed. The demand loan is advantageous for short-term borrowers in small amounts without the presence of collateral. This repayment schedule must be between parties that have an established relationship, like family, friends, or co-workers. Professional lenders or lending agencies utilize demand loans if they have a good relationship with the borrower. The most significant difference between the demand loan and the fixed loan is that the lender can request for a repayment whenever they like, with the condition of providing a prior notice as to when. The loan agreement describes the details regarding the notification requirements. When it comes to borrowers looking for larger loans for houses or cars, most lenders implement fixed loans for borrowers. For a fixed loan, the repayment process follows the outlined schedule and maturity date where the borrower must pay the principal amount together with the interest rate. In most cases, fixed loan purchases, including car loans and home loans, stand as the collateral for the borrower’s default payments. In other situations, fixed loan purchases permit the borrowers to pay off loans earlier without suffering penalties or suffer penalties due to early payments.Late or missed payments: Many loan payments lists necessary action plans that can and will be implemented by the lender if the borrower fails to make the necessary payments in the agreed timeframe. If and when a borrower pays off their loans later than agreed, there exists a breach or default loan. In this situation, borrowers are liable for any losses that the lender incurs. Aside from having the right to pursue payment for all the liquidated damages and other legal expenses, the lender can increase the interest rate of the loan, seize any collateral property of monetary value for unrepaid loans, and indicate default or breach of loan on the credit score of the borrower.Entire agreement clause: The entire agreement clause indicates that the final agreement supersedes all other terms and conditions from previous agreements, whether oral or written, established from the borrower and lender negotiations.Severability clause: The severability clause expresses that the terms of the agreement function independently. It means that other conditions that are still enforceable despite other parts of the agreement are unenforceable.Choice of law: The choice of law determines the jurisdiction or state where the laws of the lending agreement govern the content.

Types of Lending Agreement

Different lending agreements serve various purposes. Lending industries and individuals classify these documents according to their repayment terms. The section below details the three types of lending agreements and their descriptions to help individuals understand their significance and purpose.

Term lending agreements: These types of lending agreements are prevalent in the business setting. It happens when a borrower loans a specific amount of money from a lending institution or individual with the promise of repaying the loan with accompanying interest over an agreed period. Revolving lending agreements: The revolving lending agreement allows borrowers to source funds up to a specified amount, repay, and redraw a similar amount. A general example of revolving loans is credit cards that utilize revolving lines. The borrower has the capability to make multiple loans while their contract is still in place with the reservation that they must pay the total amount before the agreement expires.On-demand lending agreements: These demand lending agreements or demand notes are prevalent in short-term loans. This type of lending agreement happens more frequently between family and friends that borrow money from one another. Unlike larger loans, these lending agreements do not require collateral materials and are often in smaller amounts. On-demand lending agreements guarantee that repayment from the borrower comes from a demand from the lender, with the requirement of providing notice of repayment.

How To Write a Lending Agreement

Since there are various types of lending agreements, writing each one is unique, with lengths varying depending on its content. There are promissory notes that are only a page long, while there are full-length lending agreements with more than five pages in length. Despite having different types of this document, the guide below helps you construct a comprehensive and well-written lending agreement for your lending needs.

  • 1. Create an Introduction for the Lending Agreement

    To start the introduction of the lending agreement, ensure that you indicate the date on the top page or front page of the document. Aside from the date, include the title and the type of loan agreed upon by the borrower and lender on the very first page. If you are creating an informal personal payment agreement before receiving a loan, date the document when you first receive the money.

  • 2. Elaborate on the Terms and Conditions of the Loan

    The loan agreement must incorporate the terms and conditions of the lending agreement between the two parties. It must include the purpose of the lending agreement, terms of repayment of the loan, and the interest rates agreed upon by the parties.

  • 3. Don’t Forget To Date the Document

    It may sound like common sense, but more often than not, individuals forget to indicate the date of the document. This is a critical aspect of the agreement since repayment plans are highly dependent on the date of the loan. Select the start and end dates for the repayment term and write them on the agreement.

  • 4. Indicate the Statement of the Agreement

    One of the most critical elements of the lending agreement is the statement of the agreement. The agreement statement can follow something along the lines of the lender and borrower agreeing to the terms and conditions identified in the loan agreement. Writing the statement ensures that both parties agree and acknowledge the content of the agreement.

  • 5. Implement the Signing of the Agreement

    Without attaching signatures to the agreement, the document is unenforceable. Indicate the names of the borrower and lender below the agreement statement, with sufficient space for them to incorporate their respective signatures.

  • 6. Don’t Forget To Record the Lending Agreement

    Right after both parties shake hands and sign the agreement, the next step is to proceed to the state or county recorder office and record the agreement. This enables the loan to be protected from the parties to lose paperwork and have the assurance that the agreement is real and binding.


What is a borrowing agreement?

A borrowing agreement is another term for loan agreement together with lending agreements, term loans, IOUs, and promissory notes.

Is a loan agreement legally binding?

Yes, loan agreements and lending agreements are legally binding documents, regardless of whether the lender is a lending institution or an individual. Once both parties sign the document and are in agreement with the terms and conditions, it becomes binding under a court of law.

How can I legally lend money?

When legally lending money to friends or family members, the first step is to tell friends or relatives that you will think about lending money. Next is to look at possible finances before making the loan. Make sure to get everything in writing. It is also essential to consider debt payment plans and understand all the legal and tax consequences associated with loans. Consider the inclusion of interest rates as well.

Having a positive credit score affects an individual’s activity to request a loan in the future. Whether you are a lending individual or part of a lending institution, it is critical for there to be a clear agreement on the terms and conditions of the loan, including the involved parties, repayment terms, interest rates, and other essential provisions. Establishing the lending agreement is a must for the lender and borrower to agree on the terms. It serves as a legally binding agreement to which both parties, especially the borrower, must adhere to and fulfill. Create your lending agreement and start with the 26+ SAMPLE Lending Agreement in PDF available from the article above.