How to Write a Simple Loan Agreement Between Friends

A friendship does not make repayment terms obvious. Before transferring money, agree whether repayment is genuinely expected, whether the borrower can afford the schedule and whether the lender can tolerate delay or nonpayment. A written loan agreement helps record that conversation; it does not make an unaffordable loan collectible.

Name lender and borrower, identify their contact details and distinguish the amount promised from money actually advanced. State the currency and funding method. If the lender will transfer money in stages, record each advance rather than treating a maximum available amount as if it had already been paid.

This guide covers straightforward personal lending. A mortgage, business-credit facility, guarantee or loan secured by valuable property requires more than a short friendship agreement. Do not assume a signed promise creates an enforceable registered security interest.

Decide between fixed instalments, one maturity date and repayment on demand. “When you can” is not a useful substitute for a schedule if the lender expects monthly payments. For instalments, state the due date, amount, first payment and final maturity date. Identify where payments go and how receipts are recorded.

Illustrative interest-free schedule: CAD $3,000 advanced on September 1, repaid in 12 monthly instalments of CAD $250 beginning October 1. The twelfth instalment is due September 1 of the following year. The arithmetic is 12 × $250 = $3,000. Use actual years and all dates in the final document, and confirm that a payment holiday or changed funding date does not create a contradictory maturity date.

Specify how partial payments are credited and whether early repayment is allowed without an additional charge. Keep a simple ledger showing date, payment received and remaining principal. Both people should be able to reconcile the same balance.

If the loan is interest-free, say so expressly. If interest is charged, define the annual rate, calculation basis, compounding, when interest accrues and how payments are allocated. Do not write an unexplained monthly percentage and assume it communicates the annual cost.

Canada

Criminal Code section 347 defines a criminal rate using an actuarially calculated annual percentage rate exceeding 35%. Its definition of interest can include many fees and charges. That does not mean every rate below 35% is lawful or appropriate: exceptions, other laws and the actual calculation need review. Late fees and default charges can change the analysis.

United States

State lending and usury rules vary. Separately, IRS guidance describes tax consequences for certain below-market loans, including forgone interest. Applicable Federal Rates are published monthly for tax purposes; they are not state-law maximum interest rates. An interest-free loan should not be described as tax-free merely because no money is charged as interest.

Define what counts as late, how notice will be given and whether there is an opportunity to catch up. Decide whether one missed instalment makes the entire balance due, and obtain advice before adding penalties or broad acceleration language. A harsh clause may make the relationship worse while still failing to meet legal requirements.

Consider an agreed hardship process: the borrower contacts the lender before a due date, proposes a temporary schedule and both record any change in writing. Do not silently overwrite the original ledger. State what remains owed, whether interest continues and the new final due date.

Keep collection discussions lawful and proportionate. A contract does not authorize threats, access to someone’s accounts or taking property without the legal steps required locally. For substantial amounts, disputed capacity or financial distress, obtain independent legal advice.

The signed agreement should match bank-transfer records. A document stating that money was received should not be signed before funding unless it clearly distinguishes a future advance. Save repayment receipts and messages confirming changes; memory is an unreliable payment ledger.

When the loan is fully repaid, provide a short written acknowledgment identifying the agreement and confirming the balance is zero. If part of the debt is forgiven, document exactly what is released and seek advice on any tax consequences. Do not leave a borrower uncertain whether the lender still expects a forgotten fee.

For the basic structure of a small agreement, use our PDF signing guide for execution, but remember that a signing tool cannot decide the loan’s tax or lending-law treatment.

Read the complete agreement, not only the signature page. Compare every amount and date with the proposal or messages you agreed on. Remove placeholders, identify attached schedules, and make sure both parties have the same version. A signature should record agreement to settled terms rather than postpone difficult decisions.

Check whether the document or your jurisdiction requires particular execution, witnessing, notarization, disclosure or filing steps. Electronic signing does not remove those separate requirements. For ordinary documents, retain the agreed PDF and relevant communications in a form you can access later. Do not silently edit a signed version: document subsequent changes in an amendment accepted by the relevant parties.

See our guide to signing a PDF online for the practical signing stage. A signed document is evidence of an arrangement, not a guarantee that every provision is enforceable.