Personal Loan Agreement: How to Put a Loan in Writing

Written and reviewed by the iRunDocs Editorial Team. Last updated: October 2, 2026.

This article is general educational information about personal loan agreements in the United States. It is not legal, tax, or financial advice, and iRunDocs is not a law firm. Interest limits, collection rules, and tax treatment vary by state and situation, so consult a licensed attorney or tax professional for significant loans.

A personal loan agreement is a written contract between a lender and a borrower that records how much is being lent, how and when it will be repaid, what interest applies, and what happens if payments stop. It is the document people use when lending money to a friend, a relative, a business partner, or a small business outside a bank. Without one, a loan often turns into a misunderstanding: the lender remembers a firm repayment date, the borrower remembers "whenever you can," and neither can prove who is right.

This guide explains how to put a loan in writing properly. It covers when a loan agreement is the right document versus a promissory note, every term that belongs in the agreement with sample wording, interest and tax rules that catch family lenders by surprise, how to secure a loan with collateral, a worked example with a real repayment calculation, and the mistakes that most often turn a loan into a dispute. When you are ready to draft, you can create a loan agreement with the iRunDocs generator and review the full preview before you pay.

In this guide

• Why a written loan agreement matters
• Loan agreement, promissory note, or IOU?
• The terms every loan agreement should include, with sample wording
• Tax and legal rules that affect personal loans
• Step by step: putting a loan in writing
• Worked example: a family loan for a used work truck
• Special situations to plan for
• If the borrower stops paying
• Common loan agreement mistakes
• When to involve an attorney or tax professional
• Frequently asked questions
• Official sources worth checking
• Putting it together

Why a written loan agreement matters

Lending money informally is common and often works out. When it does not, the absence of paperwork makes every problem worse. A written agreement does several jobs at once:

• It proves the money was a loan. Without a document, a borrower may later claim the money was a gift, or a family member may dispute it after the lender dies. The IRS may also question whether a large transfer was really a loan.
• It fixes the terms. Amount, interest, payment schedule, and due date are written down instead of remembered.
• It sets expectations for late payment and default. Both sides know in advance what happens if payments are missed.
• It makes collection possible. If you ever need to go to small claims court or bring a breach of contract claim, a signed agreement is the central evidence.
• It protects relationships. Clear terms reduce the awkward conversations that strain friendships and family ties.

Loan agreement, promissory note, or IOU?

These three documents are related but not interchangeable.

Promissory note

A promissory note is the borrower's written promise to pay a specific amount, usually with interest, on stated terms. It is typically signed only by the borrower and is relatively short. Promissory notes are common for straightforward personal loans and payment plans. Our guide to writing a promissory note covers that document, and you can create a promissory note if that is all you need.

Loan agreement

A loan agreement is a two-sided contract signed by both lender and borrower. It usually contains everything a promissory note does, plus additional terms: conditions for funding, the borrower's representations, promises about how the money will be used, collateral details, default and remedy provisions, and dispute resolution. A loan agreement fits larger loans, business loans, loans with collateral, and any situation where the lender wants more than a bare promise to pay. Some lenders use both: a loan agreement setting out the full deal and a promissory note as the borrower's payment instrument.

IOU

An IOU is an informal acknowledgment that a debt exists, often without a repayment schedule or interest. It can be evidence of a debt, but it usually lacks the detail needed to enforce specific terms. For anything more than a small, short-term amount, a promissory note or loan agreement is the better choice.

Loan agreement vs. promissory note vs. IOU

Document	Who signs	Typical contents	Best fit
Loan agreement	Lender and borrower	Amount, interest, schedule, default, collateral, representations, disputes	Larger loans, business borrowers, secured loans
Promissory note	Borrower (lender optional)	Promise to pay a stated amount with interest on stated terms	Simple personal loans and payment plans
IOU	Borrower	Acknowledges a debt exists; often no schedule or interest	Small, short-term informal debts
Security agreement	Borrower (grantor)	Grants the lender rights in specific collateral	Alongside a loan agreement or note when collateral is taken
Personal guaranty	Guarantor	Promise to pay if the borrower does not	Loans to a business backed by an owner

The terms every loan agreement should include, with sample wording

The sample language below shows typical drafting choices for a personal or small-business loan. It is illustrative, not a complete agreement. Replace everything in brackets and adapt it to your situation and state law.

Parties and date

Use each party's full legal name and address. If the borrower is a business, name the business as borrower and consider whether an owner will personally guarantee the loan.

This Loan Agreement is made on [date] between [Lender full legal name], of [address] ("Lender"), and [Borrower full legal name], of [address] ("Borrower").

Loan amount and disbursement

State the principal, how it will be delivered, and when. Paying by bank transfer or check creates a record; cash does not.

Lender agrees to lend Borrower the principal sum of [amount in words] dollars ($[amount]) (the "Loan"). Lender shall disburse the Loan by [bank transfer / check] to Borrower's account ending in [last four digits] on or before [date].

Purpose of the loan

A purpose clause is optional for personal loans but useful for business loans or when a lender wants the money used for something specific.

Borrower shall use the Loan solely for [purpose, for example "the purchase of equipment for Borrower's catering business"] and for no other purpose without Lender's written consent.

Interest

Decide whether the loan bears interest, at what rate, and how it is calculated. A loan between family members can be interest-free, but there are tax considerations covered later in this guide. State law also limits how much interest can be charged.

The unpaid principal shall bear simple interest at [rate] percent per year, calculated on the basis of a 365-day year and the actual number of days elapsed, from the disbursement date until paid in full.

Interest rates on personal loans are limited by state usury laws. The caps, the exceptions, and the penalties for charging too much vary widely. In some states, charging more than the legal maximum can cost the lender some or all of the interest. Check your state's limit before setting a rate, especially for anything well above prevailing bank rates.

Repayment schedule

Most disputes come from vague repayment terms. Pick one structure and describe it precisely:

• Installments: equal payments of principal and interest on a set day each month.
• Interest-only with a balloon: interest payments for a period, then the full principal at the end.
• Single lump sum: the entire principal and interest due on one date.
• Payable on demand: due whenever the lender asks, usually with a notice period. Demand loans are flexible but give the borrower little certainty.

Borrower shall repay the Loan in [number] consecutive monthly installments of $[amount] each, beginning on [date] and continuing on the [day] of each month until [final date], when all remaining principal and accrued interest shall be due. Payments shall be made by [bank transfer to an account designated by Lender / other method].

Prepayment

Say whether the borrower can pay early without penalty. Most personal loans allow it.

Borrower may prepay the Loan in whole or in part at any time without penalty. Prepayments shall be applied first to accrued interest and then to principal.

Late payments

A short grace period and a reasonable late fee encourage on-time payment. Some states regulate late fees, so keep them modest and clearly stated.

If any payment is not received within [ten] days after its due date, Borrower shall pay a late charge of $[amount]. Acceptance of a late payment does not waive any later default.

Default and acceleration

Define what counts as a default and what the lender can do. An acceleration clause lets the lender declare the full remaining balance due when the borrower defaults, instead of suing for each missed payment as it comes due.

Each of the following is an "Event of Default": (a) Borrower fails to make any payment within [30] days after its due date; (b) Borrower breaches any other term of this Agreement and does not cure it within [30] days after written notice; (c) Borrower becomes insolvent, makes an assignment for the benefit of creditors, or becomes the subject of a bankruptcy proceeding; or (d) any statement Borrower made to obtain the Loan was materially false. Upon an Event of Default, Lender may, by written notice, declare the entire unpaid principal and accrued interest immediately due and payable.

Collateral, if the loan is secured

An unsecured loan is backed only by the borrower's promise. A secured loan gives the lender rights in specific property if the borrower defaults. How you secure the loan depends on the type of property:

• Vehicles: the lender is typically recorded as a lienholder on the vehicle's title through the state motor vehicle agency.
• Real estate: a mortgage or deed of trust is signed and recorded with the county.
• Equipment, inventory, and other business assets: a security agreement is signed, and the lender usually files a UCC-1 financing statement with the state (often the secretary of state) to make its interest effective against other creditors under Article 9 of the Uniform Commercial Code.

To secure Borrower's obligations, Borrower grants Lender a security interest in [describe the collateral precisely, for example "the 2019 [make and model] commercial oven, serial number [number]"] (the "Collateral"). Borrower authorizes Lender to file any financing statement needed to perfect this security interest and shall not sell or encumber the Collateral without Lender's written consent until the Loan is paid in full.

Taking collateral adds steps but can make a large loan far safer. Get help with real estate or complex business collateral.

Guaranty

When lending to a small business, lenders often ask an owner to personally guarantee repayment. A guaranty is usually a separate short document signed by the guarantor.

Representations of the borrower

These are statements of fact the lender relies on. Typical ones confirm the borrower has authority to sign, that the information provided is true, and, for a business, that it is in good standing.

Governing law, disputes, and signatures

Name the state whose law applies and where disputes will be heard. Some lenders add a clause allowing recovery of reasonable attorney fees if collection is needed; whether such clauses are enforceable and how they apply varies by state. Both parties sign. Electronic signatures are generally valid for loan agreements under the federal ESIGN Act and state laws based on the Uniform Electronic Transactions Act. Notarization is not usually required for the agreement itself, although documents that must be recorded, such as a mortgage, typically need it.

Tax and legal rules that affect personal loans

Below-market and interest-free family loans

The IRS publishes Applicable Federal Rates each month. When a loan between individuals carries interest below the applicable rate, section 7872 of the Internal Revenue Code can treat the forgone interest as if it had been paid, which may create taxable interest income for the lender and a gift from the lender to the borrower. There are important exceptions. Gift loans between individuals of $10,000 or less are generally excluded, as long as the money is not used to buy income-producing assets. For gift loans up to $100,000, the imputed interest is generally limited to the borrower's net investment income, and treated as zero if that income is $1,000 or less. These rules are technical, so for a large family loan, check the current Applicable Federal Rate and talk to a tax professional before setting a zero or very low rate.

Forgiving a loan is usually a gift

If the lender later forgives some or all of the balance, the forgiven amount is generally treated as a gift for federal tax purposes, which may require a gift tax return if it exceeds the annual exclusion amount the IRS sets each year. Some families plan a loan with partial forgiveness each year; that strategy works only if the paperwork and the conduct genuinely reflect a loan.

Interest the lender receives is income

Interest paid to an individual lender is generally taxable income to the lender. Keep a record of payments and how each was split between interest and principal.

Consumer lending laws

Federal consumer credit laws such as the Truth in Lending Act are aimed at creditors who regularly extend consumer credit, not at someone making a one-time loan to a friend. If you lend repeatedly, lend as a business, or charge fees, consumer lending and licensing rules may apply, and state licensing requirements vary. Get advice before lending as a regular activity.

Usury and state differences

Each state sets its own interest limits, exceptions, and penalties. Business loans, loans above certain amounts, and loans by licensed lenders are often treated differently from personal loans. States also differ in how long a lender has to sue on a written contract, in limits on late fees, and in how collateral is repossessed. Check your state's rules before you sign, and choose a governing law that has a real connection to the parties.

Step by step: putting a loan in writing

1. 1Agree on the deal first. Talk through the amount, purpose, interest, schedule, and what happens if the borrower falls behind. Write the answers down before drafting.
2. 2Decide on the document. Use a promissory note for a simple personal loan; use a loan agreement for larger loans, business borrowers, collateral, or detailed conditions.
3. 3Check the interest rate. Confirm it is within your state's limit and, for family loans, compare it with the current Applicable Federal Rate.
4. 4Calculate the payment schedule. Use an amortization calculation so the monthly payment, final payment date, and total interest are exact. Attach the schedule if helpful.
5. 5Decide on collateral or a guaranty and identify exactly what will secure the loan.
6. 6Draft the agreement. The iRunDocs loan agreement generator walks through parties, amount, interest, schedule, default, and collateral fields with a live preview of the finished document.
7. 7Review it together. Read every number aloud: amount, rate, payment, first and last due dates.
8. 8Sign before the money moves. Both parties sign, electronically or on paper, and each keeps a copy.
9. 9Disburse traceably. Transfer the funds by bank transfer or check that references the agreement.
10. 10Complete collateral steps. Record the lien on a vehicle title, file a UCC-1, or record a mortgage, as applicable.
11. 11Keep a payment log. Record the date and amount of each payment and the interest and principal split. Give the borrower a receipt or statement when asked.
12. 12Close it out. When the loan is paid, give the borrower a written release or paid-in-full letter and release any recorded lien.

Worked example: a family loan for a used work truck

Here is a simplified illustration with fictional people.

The facts. Dana lends her brother Marcus $12,000 so he can buy a used pickup truck for his landscaping business. They agree on 6 percent annual interest, repaid in 24 equal monthly installments starting the month after the loan is made. Marcus can pay early with no penalty. The truck secures the loan.

The calculation. With 6 percent annual interest, the monthly rate is 0.5 percent. Using the standard amortization formula, a $12,000 loan over 24 months at that rate produces a monthly payment of about $531.85. Over the life of the loan Marcus pays about $12,764, of which about $764 is interest (the final payment is adjusted by a few cents for rounding). In the first month, $60.00 of the payment is interest (0.5 percent of $12,000) and $471.85 reduces the principal; each later month, the interest portion shrinks and the principal portion grows. The agreement attaches the full schedule.

The tax check. Dana confirms that 6 percent is at or above the Applicable Federal Rate for a loan of this length in the month they sign, so the below-market loan rules are not a concern. She also confirms her state's interest limit allows the rate.

The collateral. Because the truck is the collateral, Dana is listed as lienholder when Marcus titles the truck with the state motor vehicle agency. When the final payment is made, she signs the lien release.

The paperwork. They sign a loan agreement that names Marcus's business, which he operates as a sole proprietor, and Marcus personally. Dana sends the $12,000 by bank transfer with the memo "Loan per agreement dated [date]." Marcus pays by automatic transfer on the fifth of each month, and Dana keeps a simple spreadsheet of payments.

What the example shows. Precise numbers, a traceable transfer, a recorded lien, and a payment log make the loan easy to manage and easy to prove. The family relationship is protected because nothing is left to memory.

Special situations to plan for

Lending to a small business

When the borrower is a business, decide who is legally responsible. If you lend to an LLC or corporation, the company is the borrower and its owners are generally not personally liable unless they sign a personal guaranty. If you lend to a sole proprietor, the owner is personally responsible because the business and the person are the same legal entity. Name the correct borrower in the agreement, confirm the person signing for a company has authority, and attach the guaranty if one is part of the deal.

Owner loans to your own company

Owners often lend money to their own LLC or corporation. Documenting the loan with a written agreement, a market-based interest rate, a repayment schedule, and actual payments helps show it is genuine debt rather than an additional capital contribution. That distinction can matter for taxes and for how the money is treated if the company later has financial trouble. An accountant can help you set the terms.

Co-signers versus guarantors

A co-borrower or co-signer generally shares primary responsibility for the debt from the start. A guarantor usually promises to pay only if the borrower does not. If a third person is backing the loan, the documents should say which role they have.

Family help with a home down payment

If a relative is helping someone buy a home, be careful about whether the money is a gift or a loan. Mortgage lenders generally want to know the source of down payment funds; a loan adds to the buyer's debts, while a gift is usually documented with a signed gift letter stating that no repayment is expected. Calling a loan a gift on mortgage paperwork is a serious problem. Decide honestly what the money is, and if it is a loan, disclose it to the mortgage lender and document it properly.

Loans repaid with work instead of money

Sometimes a borrower offers to repay by providing services. That arrangement can work, but put the value of the services, how they are credited against the balance, and what happens if the work stops in writing. Services credited against a debt can also have tax consequences for both sides.

Changing the terms later

Life happens. If both parties agree to change the payment amount, pause payments, or extend the term, sign a short written amendment that references the original agreement, states the new terms, and confirms everything else stays the same. Oral modifications are a frequent source of later disputes.

If the borrower stops paying

Even a well-written agreement cannot guarantee payment, but it gives you a clear path:

1. 1Check the agreement. Confirm the grace period, late fee, notice requirements, and what counts as default.
2. 2Talk first. Many missed payments are temporary. A written modification, such as a short payment pause or a revised schedule signed by both parties, is often better for everyone than a lawsuit.
3. 3Send written notice. If the agreement requires notice and a cure period, send it in a way you can prove, such as certified mail or email the borrower has used for the loan.
4. 4Send a demand letter. A clear written demand stating the amount owed, the basis, and a deadline is a common step before court. You can prepare a demand letter for this purpose.
5. 5Use your collateral rights carefully. Repossession and foreclosure are governed by state law and have strict rules; get advice before acting.
6. 6Consider small claims court. For amounts within your state's small claims limit, small claims court is designed for people without lawyers. Bring the agreement, the transfer record, and your payment log.
7. 7Watch the deadline. Each state has a statute of limitations for suing on a written contract. Do not let a defaulted loan sit for years.

Common loan agreement mistakes

• No written agreement at all. The single most common and most expensive mistake.
• Vague repayment terms. "Pay me back when you can" is not a schedule. Name dates and amounts.
• Wrong borrower. Lending to a business but having only the owner sign, or vice versa, can leave you without a claim against the party that actually has money.
• An interest rate above the legal limit. Check your state's usury rules.
• Ignoring family loan tax rules. Large interest-free loans can create imputed interest and gift issues.
• Cash disbursements. Cash is hard to prove. Use traceable payments in both directions.
• Collateral described too loosely. "The borrower's equipment" is far weaker than a specific description with serial numbers.
• Skipping the filing or recording step. A security interest that is never perfected may lose to other creditors.
• No default or acceleration clause. Without it, you may have to wait for each payment to become due before you can act.
• No payment records. Disputes about what has been paid are common; a simple log prevents them.
• No release at payoff. Borrowers need proof the loan is satisfied, and recorded liens need to be released.

When to involve an attorney or tax professional

A generator-built agreement suits most straightforward personal and small business loans. Get professional help for large loans, loans secured by real estate, loans to a business with several owners, loans that will be partly forgiven, interest-free family loans above the de minimis amounts, lending across state lines, or if you plan to lend regularly.

Frequently asked questions

Is a personal loan agreement legally binding?

Generally yes, if it meets ordinary contract requirements: an agreement between parties with capacity, consideration (the money lent and the promise to repay), and terms definite enough to enforce.

Does a loan agreement need to be notarized?

Usually not. Notarization is generally not required for a loan agreement or promissory note to be valid, though it can help prove signatures. Documents that must be recorded, such as a mortgage, typically need to be notarized.

What is the difference between a loan agreement and a promissory note?

A promissory note is the borrower's signed promise to pay. A loan agreement is a two-sided contract with more detail, such as conditions, representations, collateral, and default remedies. Many simple personal loans use only a note.

Can I lend money to family interest-free?

You can, but large interest-free or low-interest loans may trigger the below-market loan rules, and forgiving the loan is generally treated as a gift. Check the current Applicable Federal Rate and talk to a tax professional for significant amounts.

How much interest can I charge on a personal loan?

It depends on your state. Usury laws set maximum rates and exceptions that vary considerably. Check your state's rules before setting a rate.

Can I use electronic signatures?

Generally yes. Electronic signatures are broadly valid for loan agreements under federal and state electronic signature laws.

What if the borrower dies before repaying?

The debt generally becomes a claim against the borrower's estate. A written agreement and payment records make it much easier to present that claim.

Should I take collateral for a loan to a friend?

For larger amounts, collateral significantly reduces your risk. It also means completing the right recording or filing step, such as listing yourself as lienholder on a vehicle title.

Official sources worth checking

For current rules, look at the IRS's monthly Applicable Federal Rates and its guidance on below-market loans and gifts, your state's usury and consumer lending statutes, your secretary of state's UCC filing office for financing statements, your state motor vehicle agency for vehicle liens, and your state court's small claims information. Rules change, so rely on current versions rather than any summary, including this one.

Putting it together

A good loan agreement turns a favor into a clear arrangement both people can rely on. Agree on the terms, check the interest rate against your state's limit and the IRS rates, calculate an exact schedule, secure larger loans properly, sign before the money moves, and keep a payment log. When you are ready, create your loan agreement on iRunDocs and preview it free before you download. For simpler payment plans, see our article on promissory note basics for a payment plan.

Not legal advice: this article provides general information about personal loan agreements and does not create an attorney-client relationship. Laws and tax rules change and your facts matter, so consult a licensed attorney or tax professional about your loan.