What is a Loan Agreement?
A Loan Agreement is an agreement between a Lender and a Borrower. This Loan Agreement is a formal way of setting out the terms and conditions of the loan.
The Loan Agreement addresses what the rights are of the parties, including:
1. the initial amount being borrowed
2. how it is repaid
3. any interest payable
5. right to use the loan to support mortgages, debentures, charges and PPSR registrations.
The lender may be a human or a company. The Borrower can be a human or a company. This loan agreement can be used for intercompany loans also – from one company to a related company.
Because of the freedom to determine when repayments are made, it is also possible for this loan agreement to be used as an “at call” loan, where it is payable on demand if that is what the Lender chooses.
It is important that the Borrower fully understands the nature of what they are getting into as the consequences of not repaying can be very serious.
What are the terms of the agreement?
The beauty of this document is that you can design it to suit your circumstances. What if you don’t know the amount that you are lending? That’s ok. If you don’t know you can leave it as the default answer; “as lent from time to time”. This gives you some wiggle room.
Or sometimes you might not want to set a specific date in the agreement. You can leave it as the default answer; “payable on demand as demanded by the Lender”. Or you can put in an actual date, or you can add the instalment dates or time periods.
Lending money to mum and dad to move into aged care
Some people argue that children have never been a sound financial investment. However, we are seeing a growing trend of a child lending money to parents to get into a good retirement home. In that case, the child should build this Loan Agreement.
When mum and dad die the other children can’t argue that the loan was just a gift to dad and mum. Secondly, if mum and dad go hostile, lose their money or marry a gold digger then at least you get back some or all of the money, as it was a legally documented loan.
Lending money with security – Mortgages, debentures, charges and PPSR
The Loan Agreement allows you to lodge caveats, mortgages, fixed & floating charges, debentures and encumbrances over the Borrower’s assets.
The Lender is authorised to direct the Borrower to sign all documents required to charge and register all the Borrower’s interest in:
a) land the Borrower owns or controls from time to time (this includes the right to lodge mortgages, equitable mortgages, Mortgages, caveats and other encumbrances of any nature whatsoever); and
b) other assets, fixtures, choses in action and chattels owned or controlled by the Borrower including by way of debentures, fixed & floating charges, mortgages, equitable mortgages, caveats, Personal Property Securities Register (PPSR) and share capital
Can I add Guarantors?
If the Lender wishes, the Lender can add some additional people to guarantee the repayment of the loan.
Can the Lender borrow money and then on-lend it to the Borrower? And claim a tax deduction?
QUESTION: My business entity needs some money. My business entity can borrow money from the bank. However, the bank will lend me the money at a lower interest rate. Can I borrow the money and on-lend it to my business entity? Importantly, I want to claim a tax deduction for the interest that the bank charges me.
ANSWER: It is sad that the bank lends money to mum and dad with a home as collateral, cheaper than it lends money to your business entity.
It is common for you to borrow money from the bank with the bank using your family home as security. You then on-lend the money to your business entity.
Importantly: You can only claim the interest that the bank charges you if you make a ‘profit’ by on-lending the money.
Even a small ‘profit’ of 0.1% is enough. For example, you borrow money from the bank at 10%. You need to make a profit. So, you lend the money to your business entity with a small mark up. So, you may charge 10.1%. However, you never know what the bank is going to charge. It changes. Therefore, leave in the default wording ‘as demanded by the Lender from time to time’.
For the full answer start building the Loan Agreement and read the full hint on this topic.
Can I charge an excessive interest rate to move profit from one entity to another?
In a service trust, the doctor, engineer, or other professional hires the services of his family members and family trust to do jobs for the practice. The service trust does the bookkeeping, cleaning, providing staff etc… It can also lend money to the doctor for business purposes. The charges have to be fair and commercial. Similarly, be careful not to charge an interest rate that is over the fair market rate.
For the full answer start building the Loan Agreement and read the full hint on this topic.
Professional lenders of money
There are two types of Lenders:
- Professional lenders: Example: banks such the Commonwealth Bank of Australia and ANZ, other lending institutions such as AMP; pawnbrokers and shop owners providing laybys.
- Non-professional lenders: other people such as mum and dad lending money to a child; a person lending money to a friend; a person or company lending money not as part of their business or as a one of transaction
This Loan Agreement is for non-professional lenders. If you are a bank requiring loan agreements, then please contact us for a quote.
Can I just do a Loan Agreement on the back of an envelope?
In the movies, IOUs are often handwritten on a piece of paper. Sometimes instead of a Loan Agreement, someone does a ‘minute’. Both approaches fail. In Rowntree v FCT  FCA 182 shows the additional care required to document even simple related-party transactions, such as loans. In this case, the taxpayer, a practising NSW lawyer, claimed he borrowed over $4m from his group of private companies. The Court said:
‘Mr Rowntree has not deliberately chosen to ignore the law. His evidence presented to the Tribunal suggests that he genuinely believed that there were arguments to support his view that a loan was in existence.’
He failed. Only a legally prepared Loan Agreement satisfies the ATO, Bankruptcy Courts and Family Court. Only a legally prepared Loan Agreement supports mortgages and debentures.
What does this document contain?
1. Our letter of advice
2. Loan Agreement
You are dealing directly with a law firm website, therefore you:
1. retain legal professional privilege
2. benefit directly from the law PI insurance
3. receive legal advice from us
4. you are protected by our 100% money back guarantee on every document you build
Contact us for more legal advice.
You are building your legal document on a legal practice’s website. Telephone us anytime for legal advice. We can help you answer the questions.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers & Solicitors
National legal practice
National: 1800 141 612
The Borrower is the entity (human or company) who is going to receive the capital (e.g. money) from the lender.
The Lender is the entity (human or company) who is passing the capital (e.g. money) to the Borrower.
In this Loan Agreement, the person who is the Lender is lending the money and the person who is the Borrower is the person borrowing the money.
Why is it better to prepare my legal document on a legal practice website?
You are dealing directly with a lawyer website, therefore you:
- benefit from legal professional privilege,
- benefit directly from the law firm’s PI insurance
- receive legal advice from us.
- You are supported by our 100% money back guarantee on every document you build.
How do I build the Loan Agreement?
Answer the questions on our website
Read the Summary page
Lock and Build your document
Type in your Credit Card details
The Loan Agreement, our covering letter and Tax Invoice are emailed to you
Print and sign the Agreement
What do I get?
The legal document that is emailed to you contains:
Loan Agreement Document
Our law firm’s letter of advice on our law firm’s letterhead and signed by one of our Partners.
Sometimes you don’t know the amount that you are lending. If you don’t know you can leave it as the default answer; “as lent from time to time”. This gives you some wiggle room.
If you do know but are paying it in instalments, then put it all in as one figure.
Otherwise, just put in the total figure. Remember to put in the dollar sign.
Sometimes you might not want to set a specific date in the agreement. You can leave it as the default answer; “payable on demand as demanded by the Lender”. This gives you some wiggle room.
If you want it all paid back on the one date, just enter that date in.
If it is being paid back in instalments, you can word it how you like. for example
1) “Payable in instalments of 10% per calendar month”
2) “Half to be paid on 21 September 2018, and the remainder to be paid on 21 September”
3) “$100 to be repaid weekly for 10 weeks starting from 4 July”
There are five ways you can answer this question depending on how you’d like to do it:
1) If you are charging no interest, put the word “Nil”
2) If you aren’t sure what the interest rate is yet, leave it as the default, which is “as demanded from the lender from time to time”
3) You can put in a flat rate, for example, “5%” (don’t forget to put the % sign in)
4) Keep it variable, for example, “2% above the Commonwealth Bank interest rate”.
5) You can also use the inflation rate. You could word it something like “calculated according to the percentage increase in the Consumer Price Index (all groups) for the average of the capital cities of the Commonwealth of Australia. (As published by the Australian Bureau of Statistics or body that takes over that function.)”.