Payments for principal and interest are made at regular intervals Here is a simple chart explaining the difference between an IOU, a promissory note, and a loan agreement. So if the borrower misses a payment or goes bankrupt, the lender can make the entire amount of the loan plus any interest due and payable immediately. In a loan agreement, a lender can usually also accelerate the loan if the borrower defaults. This agreement is typically used for more complex payment arrangements and often gives the lender and borrower more protections such as borrower representations, warranties, and covenants. What’s the Difference Between a Loan Agreement, Promissory Note, and IOU?Ī loan agreement is generally more formal and less flexible than a promissory note or IOU. In exchange, the lender can’t change their mind and decide not to lend them money, especially if the borrower relies on the lender’s promise and makes a purchase expecting that they’ll receive the loan. The borrower agrees that the borrowed money will be repaid to the lender at a future date, often including interest. Borrowing money from an institution to finance a home, car, or university tuitionĪ loan agreement is a written contract between two parties - a lender and a borrower - that can be enforced in court if one party does not hold up their end of the bargain.Lending or borrowing money from your friends.Lending or borrowing money within your family.You should use loan agreements any time you lend or borrow money, with or without interest. It establishes how much money is being borrowed and sets other terms of the loan, including the repayment schedule and interest, if applicable.

A loan agreement is a legal contract between a borrower and a lender.

Loan agreement extension template