Drafting a Personal Loan Agreement: Your Step-by-Step Guide

Lending money to friends or family can be tricky – you want to help, but also protect your finances. That’s where a well-drafted personal loan agreement comes in. This legal document outlines the terms of the loan, including repayment, interest, and consequences of default. In this step-by-step guide, we’ll walk you through the process of writing a comprehensive personal loan agreement. You’ll learn what information to gather, how to determine key loan terms, and what clauses to include. We’ve also provided a template and sample for easy reference. Let’s get started on creating an agreement that safeguards your interests as a lender.

Preparing to Draft Your Personal Loan Agreement

Gather Essential Information
Before putting pen to paper, collect all relevant details about the loan:

• Loan amount: Decide the exact sum you’re lending, whether as a lump sum or instalments.

• Interest rate: Determine if you’ll charge interest, and at what rate. Will it be simple or compound interest?

• Repayment schedule: Establish the frequency of repayments (weekly, monthly, etc.), the due date, and loan term.

• Late payment penalties: Specify charges for overdue payments, like a 2% penalty on outstanding amounts.

• Collateral: If the loan is secured, note the collateral details, such as property address or vehicle registration.

Consult Legal and Financial Experts
While not mandatory for personal loans, it’s wise to seek advice from professionals:

• A lawyer can review the agreement to ensure it complies with local laws and regulations.

• A financial advisor can assess the borrower’s ability to repay based on their income, debts, and credit history.
  Their insights will help create a fair and enforceable personal loan agreement.

Identifying the Parties Involved

Lender and Borrower Information
Your agreement must clearly name the lender and borrower, along with their:

• Permanent addresses

• Contact numbers

• Email addresses

• Government-issued ID numbers (Aadhaar, PAN, etc.)
  Double-check that both parties are legally competent to sign the personal loan agreement.

Determining the Loan Amount and Purpose

Loan Amount and Disbursal

• Mention the exact loan amount in words and figures, like “Rupees One Lakh Only (₹1,00,000)”.

• Specify whether the loan will be disbursed as a lump sum or in tranches.

• If in tranches, provide a disbursal schedule with dates and amounts.

Loan Purpose
While not mandatory, stating the loan’s purpose helps assess its viability:

• Example: “The loan amount will be used to finance the borrower’s online business startup costs.”

• This can guide decisions on loan quantum, interest rate, and repayment capacity.

Setting the Interest Rate and Repayment Terms

Interest Rate and Calculation

• Choose between fixed and floating interest rates, and simple or compound interest.

• For floating rates, mention the benchmark rate (like MCLR) and the spread.

• Show the interest calculation with a formula and example:

  Loan Amount	Interest Rate	Loan Tenure	EMI Formula	Calculation	Monthly EMI
  ₹5,00,000	12% p.a.	5 years	[P x R x (1+R)^N]/[(1+R)^N-1]	[5,00,000 x (0.01) x (1.01)^60]/[(1.01)^60-1]	₹11,122

Repayment Schedule

• Specify the EMI amount, payment frequency, and due dates.

• Mention the loan tenure in months or years.

• Example: “The borrower will pay ₹11,122 on the 5th of every month for 5 years, starting from 5th August 2023.”

• Include a repayment schedule table for clarity.

Prepayment and Foreclosure Terms

• State whether partial or full prepayment is allowed.

• If allowed, mention the prepayment charges and notice period.

• Example: “The borrower can prepay up to 25% of the principal annually without charges. A 30-day notice is mandatory.”

Default and Late Payment Penalties

Events of Default
List scenarios that constitute default, such as:

1. Missing an EMI payment by more than 30 days

2. Providing false information in the loan application

3. Using the loan amount for unauthorised purposes

4. Selling or damaging the collateral

Penalties and Consequences

• Detail the penalty for each type of default.

• Example: “For every delayed EMI payment, a 2% penalty will apply on the outstanding amount.”

• Specify actions the lender can take, like demanding immediate repayment or seizing collateral.

Modifying and Terminating the Agreement

Amendment Clause

• Explain the process for amending the personal loan agreement.

• Example: “Any changes to this agreement require written consent from both parties.”

Termination Clause
Establish termination grounds and procedures:

1. The agreement naturally terminates on loan repayment.

2. The lender can terminate on event of default.

3. The borrower can terminate by prepaying the loan.

4. Either party can terminate with a 30-day notice.

Dispute Resolution and Governing Law

Dispute Resolution

• Specify how disputes will be settled, such as negotiation, mediation, or arbitration.

• Example: “Disputes will first be resolved through negotiation. If unsuccessful, the parties will appoint a sole arbitrator.”

Governing Law and Jurisdiction

• Mention the state laws that govern the personal loan agreement.

• State the city where legal proceedings will occur.

• Example: “This agreement is governed by the laws of Maharashtra, with the courts of Mumbai having exclusive jurisdiction.”

Execution and Witnessing

Signature and Dating

• Create space for the borrower and lender to sign and date the agreement.

• Ensure the signatures are accompanied by the signatories’ full names and designations.

Witnessing

• Provide space for two witnesses to sign, along with their full names, addresses, and contact details.

• Choose witnesses who are not related to either party and are above 18 years of age.

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FAQs:

1. What is a personal loan agreement?
   A personal loan agreement is a legal contract that sets out the terms and conditions for lending money between two parties, typically friends or family members.

2. Why is it important to have a personal loan agreement in writing?
   A written agreement makes the loan terms clear, avoids misunderstandings, and offers legal protection to both lender and borrower in case of disputes.

3. What essential elements should be included in a personal loan agreement?
   Key elements include: parties’ details, loan amount, interest rate, repayment schedule, default penalties, prepayment terms, dispute resolution, and governing law.

4. How do you outline the terms and conditions in a personal loan agreement?
   Clearly state each term under a separate heading, like interest rate or late payment penalties. Use simple language, give examples, and provide a sample repayment schedule for clarity.

5. Where can I find a personal loan agreement template online?
   You can access free personal loan agreement templates in Word format on Airtel Finance’s website: https://www.airtel.in/finance/personal-loan/documents. Customize the template as per your needs.

Conclusion:

Creating a robust personal loan agreement safeguards your interests as a lender and prevents misunderstandings with the borrower. By following this step-by-step guide, you can draft an agreement that is comprehensive, legally enforceable, and tailored to your specific lending arrangement. Remember to gather all necessary information, consult experts, and clearly outline the loan’s key terms and conditions. If you need further guidance, you can access free loan agreement templates on Airtel Finance’s website at https://www.airtel.in/finance/personal-loan/documents. You can also explore Airtel Finance’s affordable personal loans with transparent terms, simple eligibility criteria, and quick processing through the Airtel Thanks app. Here’s to building financially-savvy lending relationships!