To write a loan agreement, put every material term of the loan into a single signed document: the full names and addresses of the lender and borrower, the exact principal, the interest rate, the repayment schedule and dates, what counts as default, any collateral, which state’s law governs, and dated signatures from every party. A verbal promise is hard to prove and harder to enforce; a written contract that covers those elements is what a court will actually look at if something goes wrong.
The sections below walk through each clause in the order you’d draft it.
Name the Parties Correctly
At the top of the document, label one party “Lender” and the other “Borrower.” Use each person’s full legal name exactly as it appears on a government-issued ID such as a driver’s license or passport. Include a current physical address for each — not a P.O. box. The address matters for two reasons: it’s where formal legal notices get delivered, and it helps establish which state’s laws apply if that ever becomes a fight.
If a third person is involved — a co-borrower who shares the debt or a guarantor who agrees to pay if the primary borrower can’t — identify that person with the same level of detail and give them a clear role in the agreement.
State the Loan Amount
Write the principal in both numerals and words, for example “$15,000 (Fifteen Thousand Dollars).” If a typo slips into one format, the other controls, which prevents a fight over what the number actually is. If the money will go out in stages instead of all at once, describe the disbursement schedule and any conditions attached to each tranche.
Back the number up with a paper trail. A wire confirmation, a bank statement, or a canceled check that matches the principal makes it much harder for anyone to later claim a different amount changed hands.
Set the Interest Rate
State whether interest is charged and, if so, the exact annual rate. Say which method applies: simple interest is calculated only on the remaining principal; compound interest is calculated on principal plus previously accrued interest. The total cost to the borrower can differ significantly between the two, so the agreement needs to be explicit.
Every state sets its own usury ceiling on the maximum legal rate. There is no single federal cap on private loans, so the limit depends on where you live and, in some cases, on the type of loan. A rate above the legal cap can wipe out the interest portion of the agreement entirely, and some states go further, forfeiting all interest or even the principal. Check the usury statute in the state whose law will govern the agreement before you settle on a number.
The AFR Rule for Family and Friend Loans
If you lend to a friend or family member at a rate below the IRS’s Applicable Federal Rate — or charge no interest at all — the IRS may treat the missing interest as a taxable gift from lender to borrower. This is called imputed interest, and it applies to what the tax code labels “below-market loans.”1Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates
The AFR changes monthly. For January 2026, the minimum annual rates (compounded annually) are roughly 3.63 percent for short-term loans of three years or less, 3.81 percent for mid-term loans over three years up to nine years, and 4.63 percent for long-term loans over nine years.2Internal Revenue Service. Revenue Ruling 2026-2 Charging at least the AFR for the correct term length avoids the imputed-interest issue.
Two exceptions ease the rules for smaller personal loans. If the total you’ve lent one person stays at or below $10,000, the imputed-interest rules generally don’t apply, unless the borrower is using the money to buy income-producing assets or the arrangement is a tax dodge. For loans between individuals totaling $100,000 or less, the imputed interest attributed to the borrower is capped at the borrower’s actual net investment income for the year; if that investment income is $1,000 or less, it’s treated as zero.1Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates
When imputed interest on a gift loan exceeds the annual gift-tax exclusion, which is $19,000 per recipient for 2026, the lender has to file IRS Form 709 (the gift-tax return) even if no gift tax is actually owed.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 20264Internal Revenue Service. Gifts and Inheritances
Write the Repayment Terms
Two dates anchor the agreement. The effective date is the day the lender transfers the money and the contract takes effect. The maturity date is the final deadline for full repayment of principal and any remaining interest. On a five-year term, the maturity date falls sixty months from the effective date.
Between those two dates, describe exactly how the borrower pays. Common structures include a single lump sum at maturity, equal monthly or quarterly installments, or interest-only payments with a balloon payment of the remaining principal at the end. Whichever you use, list the payment amount, the frequency, and the due date for each cycle.
Grace Period
A grace period gives the borrower a short window after each due date, commonly five to fifteen days, to pay without triggering a late fee or default. If you include one, state the exact number of days and make clear that the payment must be received within that window, not just mailed.
Late Fees
Late-fee clauses compensate the lender for the trouble of chasing overdue payments. Courts treat these fees as pre-agreed damages, which means the amount has to be reasonable relative to the lender’s actual costs. A fee that looks more like punishment than a cost estimate may be struck down as an unenforceable penalty. Typical approaches are a flat dollar amount (say $25 or $50) or a small percentage of the overdue payment, usually 3 to 5 percent. Say when the fee kicks in and whether the grace period applies before it’s assessed.
Prepayment
State whether the borrower can pay off the loan early and, if so, whether any prepayment fee applies. Prepayment fees compensate the lender for interest income lost when a loan is retired ahead of schedule. For certain high-cost mortgage loans, federal law prohibits prepayment penalties outright.5Office of the Law Revision Counsel. 15 U.S. Code 1639 – Requirements for Certain Mortgages Many private loan agreements waive prepayment fees anyway to make the deal easier on the borrower. Address the topic explicitly either way.
Add a Collateral Section if the Loan Is Secured
A secured loan is backed by specific property — a car, equipment, real estate, or a financial account — that the lender can claim if the borrower stops paying. An unsecured loan has no pledged property, which usually makes it riskier and may justify a higher rate. If collateral is part of the deal, the agreement needs a section that does three things.
First, describe the property with enough detail to identify it. Under Article 9 of the Uniform Commercial Code, the description must “reasonably identify” the property, and a vague reference like “all of the borrower’s assets” isn’t enough for a security agreement.6Cornell Law School. UCC 9-203 – Attachment and Enforceability of Security Interest Use a VIN for a car, a serial number for equipment, or the legal description from the deed for real property.
Second, make sure the security interest actually attaches, which is the legal term for becoming enforceable. Three things have to happen: the lender has to give value (the loan funds), the borrower has to have rights in the collateral, and the borrower has to sign a security agreement that describes the collateral.6Cornell Law School. UCC 9-203 – Attachment and Enforceability of Security Interest
Third, perfect the interest so other creditors can’t jump the line. For most personal property, that means filing a UCC-1 financing statement with the Secretary of State’s office in the state where the borrower is located. For real property, it means recording a deed of trust or mortgage with the county recorder. Skip this step and a later-filing creditor may end up with a superior claim to the same collateral.
Write the Default and Acceleration Clauses
The default clause is what makes the rest of the agreement enforceable. Define exactly what counts as a breach. A basic version says the borrower is in default if any payment remains unpaid a set number of days after the due date, often 30. Many agreements add other triggers: failing to keep collateral insured, giving false information in the agreement, or filing for bankruptcy.
Acceleration
An acceleration clause lets the lender demand the entire remaining balance once a default occurs, not just the missed installments. Without it, the lender can only chase each missed payment as it comes due. When acceleration is tied to the lender’s judgment that repayment is at risk, the lender has to exercise that power in good faith rather than on a whim.
Notice and Cure
Before the lender accelerates, sues, or seizes collateral, the agreement should require a written notice of default. The notice tells the borrower what went wrong, how much is owed, and how long the borrower has to fix it — a “cure period” of 15 to 30 days is common. These steps protect the lender against claims of acting too hastily and give the borrower a fair chance to catch up.
Attorney Fees and Collection Costs
Add a clause shifting the cost of enforcement — attorney fees, court filing fees, and collection expenses — to the borrower if default happens. Without it, each side generally pays its own legal costs even if the lender wins. Some states limit or regulate these fee-shifting provisions, so check local rules before finalizing the language.
Pick a Governing Law
A governing-law clause names which state’s laws apply to the agreement. This matters most when the lender and borrower live in different states, because interest caps, default remedies, and statutes of limitations vary. Courts usually honor the parties’ choice, but the state you pick should have a real connection to the loan — where one of the parties lives, or where the money was disbursed. A choice with no relationship to the transaction can be challenged as unenforceable.
Sign, Witness, and Store the Document
Every party signs and dates the same document. Signatures are what turn the written terms into a binding contract. A few extra steps make disputes much harder to raise later.
Notarization means a licensed Notary Public verifies each signer’s identity against a government-issued ID and stamps the document with an official seal. That makes forged-signature claims very hard to sustain. Adding two disinterested witnesses — people with no financial stake in the loan, who print their names and addresses beside their signatures — is another way to prove the signing actually happened. Most states don’t require witnesses for a standard loan agreement, but they help if the document isn’t notarized.
Electronic signatures are legally equivalent to ink-on-paper signatures for most commercial transactions, including loan agreements, as long as the electronic record can be retained and reproduced accurately by every party.7Office of the Law Revision Counsel. 15 U.S. Code 7001 – General Rule of Validity A few categories of documents are carved out of that rule — wills, certain family-law matters, court orders, and notices of default or foreclosure on a primary residence — but a standard personal loan agreement is not among them.8Office of the Law Revision Counsel. 15 U.S. Code Chapter 96 – Electronic Signatures in Global and National Commerce
Once signed, keep the original somewhere secure and give a complete copy to every party. If the loan is secured, the lender should also handle the UCC-1 filing or deed of trust recording described above.
Two Boundaries Worth Knowing
Casual lending generally doesn’t trigger the federal Truth in Lending Act or its implementing Regulation Z. Those rules apply only to “creditors,” and you become one under TILA only if you extended consumer credit more than 25 times in the prior calendar year — or more than 5 times if any of the loans were secured by a home.9Federal Register. Truth in Lending (Regulation Z) Consumer Protections for Home Sales Financed Under Contracts for Deed If you do cross those thresholds, Regulation Z requires specific written disclosures before signing: the annual percentage rate, the finance charge in dollars, the amount financed, and the total of all payments.10eCFR. 12 CFR Part 1026 – Truth in Lending (Regulation Z) Even when TILA doesn’t apply, including those figures is a reasonable practice.
The other boundary is time. Every state sets a statute of limitations for suing on an unpaid debt. For written contracts, the period runs from roughly 3 years in some states to 10 or more in others. Once that clock runs out, the lender generally loses the right to sue, even if the money is clearly owed. Your governing-law clause helps determine which state’s deadline applies, so if you’re the lender, track the maturity date and any missed payments closely.