A loan agreement is created when a lender agrees to lend money to a borrower. It acts as an enforceable contract between the parties where the borrower must pay back the lender according to the terms set out in the agreement.
A loan agreement can be used when an individual or business lends money to another individual or business and a written payment plan is required.
The payment plan you choose to adopt in your loan agreement depends on how the borrower will make payments. There are typically four options:
Interest is usually a percentage of the principal amount. It is charged on the outstanding amount owed to make up for the cost of inflation as well as to reimburse the lender for the risk and opportunity cost of lending it.
Before lending money to a third party, always carry out due diligence checks to be sure that they they’re able to pay back the loan. Use a recognised credit reference agency to do this as well as carry out a search at Companies House (if they’re a limited company). Additionally you’ll want suitable reference from their bank, suppliers, landlord etc.