What to include in a loan agreement: a checklist for small lenders

A clear written loan agreement is the best protection a lender has. It removes arguments about what was agreed, gives you something to point to when a payment is late, and is the basis for any legal action if things go wrong. Weak or missing agreements are one of the most common reasons small lenders cannot recover money they are owed.

This guide sets out the clauses a small lender's agreement should cover. Laws on consumer credit, interest, fees, formalities and enforcement differ by country, so treat this as a checklist of topics, and have your final document reviewed by a lawyer where you operate.

The essential clauses

1. Parties

• Full legal names, addresses and identification numbers of the lender and borrower.
• Names and details of any guarantor.
• The date and place of signing.

2. The loan amount and how it is paid out

• The principal amount.
• The date and method of disbursement.
• Whether any fees are deducted from the amount paid. If so, state the net amount the borrower receives. See deductible vs capitalized fees.

3. Purpose

• What the loan is for, where relevant. It is useful for productive-use loans and some regulated lending.

4. Interest

• The rate and how it is calculated: flat, reducing balance, interest-only or compound. Say per what period: per month, per year. See how to calculate loan interest.
• The day-count convention if you calculate daily.
• Whether interest continues after the loan matures, and at what rate.
• Where required by law, an annual percentage rate or total cost of credit. See effective interest rate on flat rate loans.

5. Fees and charges

• List every fee: processing, insurance, admin, and how each is collected.
• State that there are no other charges except those listed, if that is true.

6. Repayment terms

• The number, amount and dates of installments, or a schedule attached as an annex.
• The total amount repayable.
• Where and how payments are made, and that a receipt will be given.
• What happens if a due date falls on a non-working day.
• Whether early repayment is allowed, and any charge or rebate.

7. How payments are applied

• The order in which a payment is allocated: for example penalties, fees, interest, then principal. See repayment allocation order.
• What happens to partial payments.

8. Late payment and penalties

• What counts as late, and any grace period.
• The penalty amount or rate, and when it starts. Some jurisdictions cap or forbid certain penalties.
• Any cap on total penalties.

9. Security

• A description of the collateral: type, identifying details, value.
• The borrower's promise not to sell or pledge it elsewhere.
• Insurance requirements.
• The lender's right to hold documents or take possession, subject to law.
• What happens to the collateral on full repayment.

See collateral vs guarantor.

10. Guarantee

• The guarantor's identity and signed promise, stating what they guarantee and any limit.
• Confirmation that they understand and have had a chance to seek advice.

11. Default and remedies

• Events of default: missed payments beyond a set number of days, false information, sale of collateral, insolvency, death, leaving the country or business.
• The lender's remedies: demand for the full balance, enforcing security, claiming from the guarantor, reporting to credit bureaus where lawful.
• Notice requirements before action.
• Recovery costs, where allowed by law.

12. Borrower's representations

• The borrower confirms the information given is true and complete, and that they can make the payments.
• They agree to tell you of changes in address, employment or contact details.

13. Data and consent

• Consent to collect, use and share the borrower's data, for example with credit bureaus, guarantors and auditors, in line with data protection law.
• Explanation of how their data is used and protected.

14. Changes and notices

• How the agreement can be varied (in writing, signed by both).
• How notices are given and deemed received.

15. Governing law and disputes

• The law that applies.
• How disputes are resolved: courts, arbitration or mediation.

16. Signatures

• Signatures of the borrower, the lender and any guarantor, with dates.
• Witnesses if required locally.
• A copy given to the borrower.

Plain language matters

An agreement the borrower cannot understand is harder to enforce and invites disputes. Use short sentences and ordinary words. Explain key terms, such as interest and default, in plain language, and consider summarizing the main terms on the first page: amount, total to repay, schedule, penalties and security. Where borrowers have limited literacy, read the agreement aloud in their language and record that you did so.

Attach the schedule

A repayment schedule as an annex removes doubt about what is due and when. For reducing balance loans, show the interest and principal split for each installment. See loan amortization schedule explained.

Record and keep it

Keep the signed original safe, scan a copy and attach it to the loan record along with the KYC documents. See KYC checklist for small lenders. If a dispute arises, the signed agreement and the payment history are your evidence.

Common mistakes

• Verbal agreements or only a message.
• Missing or unclear interest calculation, or no mention of how fees are taken.
• No schedule.
• No clause on partial payments.
• Penalties that are unclear or unlawful.
• A guarantee the guarantor did not understand.
• Copying a template that does not fit local law.
• Not giving the borrower a copy.
• No signature, date or witness.

Loan agreements and LoanTabs

LoanTabs keeps the loan's terms, schedule, payments, statements and attachments together, and you can attach the signed agreement, ID documents and security documents to the borrower and loan record. It does not generate legal agreements or provide e-signature, so prepare the agreement yourself or with your lawyer and attach the signed copy. Printable loan statements and PDF receipts support the same record. See loan servicing and borrower management.

FAQ

What should a loan agreement include?

Parties, amount, interest and how it is calculated, fees, repayment schedule, how payments are applied, penalties, security and guarantees, default and remedies, governing law and signatures.

Do I need a lawyer to write a loan agreement?

It is strongly advisable to have a lawyer in your country review the document, because legal requirements differ and mistakes can make terms unenforceable.

Is a verbal loan agreement valid?

In some places verbal agreements can be binding, but they are very hard to prove. Always use a written, signed agreement.

Should a loan agreement include a repayment schedule?

Yes. Attaching the schedule removes doubt about the amounts and dates.

Can LoanTabs generate my loan agreement?

No. LoanTabs stores the signed agreement and documents with the loan, but it does not draft agreements or provide e-signature.