Loaning money – whether to friends, family members, or in relation to business, can be a generous act, or a profitable enterprise. However, when expectations around the terms of the loan aren’t clearly documented, things can go wrong quickly.
Having a well written loan agreement can minimise the risk of any misunderstanding regarding the terms of the loan, and ultimately can protect both parties. This article will explain what a loan agreement is, how to make a loan agreement, whether you can write your own private loan agreement, and any legal considerations in Australia.
What is a loan agreement contract?
A loan agreement is a contract that sets out the terms upon which money is lent between parties. It should be in writing, and at a minimum, will usually include the following terms:
The loan amount – how much is being borrowed?
The rate of interest and how it is calculated – for example, is it a fixed or variable interest rate? Is it a simple interest calculation or compound interest?
The term of the loan – how long before the whole loan needs to be repaid? It is also important to document whether a borrower can make early repayments of the loan or not, and whether any penalties might apply.
How often the loan is to be repaid – for example, will there be instalment payments or will the lender accept a lump sum at the expiration of the loan term?
Whether there is any security being provided for the loan – the borrower might offer personal or business assets to the lender as collateral for the loan.
Consequences of default, for example what will happen if the borrower doesn’t make repayments on time?
Loan agreement repayments: How much and how often?
The amount and frequency of loan repayments will depend on the commercial agreement between the parties. For example, a home loan in Australia that is secured by a mortgage will often be for a 30 year term, with monthly repayments required. Conversely, a personal loan to a friend might just require repayment of a lump sum in 6 months.
Can I write my own loan agreement?
Technically, yes – anyone can write their own loan agreement, and sometimes people use downloadable templates to prepare a loan agreement. There are several risks with doing this. Many online templates are written for foreign jurisdictions and may not comply with Australian law. Some of the risks of writing your own loan agreement or using a template loan agreement include:
The agreement might not properly and clearly document all of the required terms of the lending arrangement.
The agreement might not be tailored to your circumstances.
The agreement might not be legally enforceable.
Often a lawyer’s help will be needed to register securities in addition to the loan agreement contract such as PPSR charges, caveats, mortgages, or separate contracts containing personal guarantees.
Many downloadable templates might use incorrect terminology or reference foreign laws or processes.
Having an Australian lawyer prepare a loan agreement is best practice when lending money in Australia, as there are many practical and legal considerations. These legal differences even exist between different states in Australia.
Are loan agreements legally binding?
A properly written and signed loan agreement will be legally binding. This means that if a party does not uphold their obligations, the other party will be able to seek enforcement of the agreement from a court, or exercise their rights over securities.
What’s the difference between a loan agreement and a mortgage?
If a loan is being secured against real estate, a mortgage will usually be registered over the property. This means that the borrower will not be able to sell the property without first repaying the lender. It also means that the lender will be able to sell the property if the borrower fails to comply with the terms of the loan agreement. In New South Wales, a mortgage is registered electronically with NSW Land Registry Services. To do this, a party will typically engage a property lawyer to prepare the mortgage paperwork and arrange registration in addition to writing the loan contract.
Lawyer fees for loan agreements
The legal fees for a loan agreement can vary significantly based on the complexity of the arrangement. Things that might affect the cost of preparing or reviewing loan agreements include:
The size of the loan.
What types of securities are being offered and whether additional documents will be required, such as a charge in the Personal Property and Securities Register, or a Mortgage at NSW Land Registry Services.
Whether any due diligence is required on the borrower or the lender.
Whether the terms of the loan agreement get negotiated, and the extent of those negotiations.
Whether there are structures such as companies or trusts involved in the transaction.
At Thornton and King, we are able to offer fixed fee pricing for the preparation of loan agreements to simplify things for you.
Why you should always use a lawyer to draft a loan agreement
Failing to properly document the terms and conditions of the loan in a legally binding agreement can be incredibly expensive and could cause you to lose all of the funds being lent if things go wrong. By engaging a specialist lawyer to prepare your loan agreement you can maximise your chances of having a loan repaid, and have the best chance of enforcing the agreement and any security if the borrower does end up defaulting on the loan.
Thornton + King can help with your loan agreement
Our specialist lawyers are experts in writing loan agreements. We have decades of experience drafting loan agreements for all types of arrangements, including personal loan agreements, family loan agreements, and business loan agreements. To speak to a lawyer about preparing a loan agreement, give us a call or submit an enquiry now.
