What is a Loan Agreement?
A Loan Agreement is an agreement between a Lender (eg: a bank) 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, the details of the amount being borrowed, when it will be repaid and what interest the lender would like paid to them.
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.
With your interest, you have a few options too. You can charge Nil, or leave it open to be decided in writing later (“as demanded from the lender from time to time”) or a flat rate or varying rate.
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.
In that case, the child should build this Loan Agreement. When dad and mum die the other children can't argue that the loan was just a gift to mum and dad. Secondly, if mum goes hostile, loses her money or marries a toy boy then at least you get back some or all of the money, as it was a legally documented loan.
Lending money with security
The Loan Agreement allows you to lodge caveats, mortgages, fixed & floating charges, debentures and encumbrances over the Borrower's assets.
Can I add Guarantors?
If the Lender wishes, the Lender can add some additional people to guarantee the repayment of the loan.
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.
What does this document contain?
* The Loan Agreement Document
* Our letter of advice for your due diligence file.
Why is it better to prepare my legal document on a law firm’s website?
You are dealing directly with a law firm website, therefore you:
- retain legal professional privilege
- benefit directly from the law PI insurance
- receive legal advice from us
- 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)".