Loan Agreement Between Friends: How To Draft It Right!

Key Takeaways:

  1. Understanding the Need: Recognize the importance of a formal agreement to prevent misunderstandings.
  2. Essential Components: Key elements such as loan amount, interest rate, repayment schedule, and signatures
  3. Legal Considerations: Ensure the agreement is legally binding and adheres to local laws.
  4. Template Usage: Utilize a customizable template for ease and accuracy.
  5. Communication and Transparency: Maintain open communication for a smooth process.


Lending money to friends can often lead to complications if not handled carefully. A well-crafted loan agreement is essential to set clear terms and avoid future misunderstandings. This article provides a step-by-step guide to writing a loan agreement between friends, complete with a downloadable template for ease of use.

Step 1: Assess the Need for a Formal Agreement

Why It’s Important:

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  • Prevents Misunderstandings: Clearly outlines the terms, avoiding future disputes.
  • Legal Protection: Provides a legally binding document in case of disagreements.

Real-Life Example: Consider John and Sarah, where John lent Sarah $5,000 without a formal agreement, leading to a disagreement over repayment terms.

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Step 2: Gather Essential Information

Components of a Loan Agreement:

  1. Loan Amount: The total amount being lent.
  2. Interest Rate: If applicable, the rate charged.
  3. Repayment Terms: Schedule and mode of repayment.
  4. Parties Involved: Names and details of the lender and borrower.
  5. Date of Agreement: The date when the agreement is signed.
  6. Signatures: Legal validation of the agreement.

Step 3: Understand Legal Considerations

Legalities to Consider:

  • Jurisdiction: Laws vary by location; ensure the agreement adheres to local regulations.
  • Legality of Terms: Avoid terms that could render the agreement void.

Tip: Consult a legal expert if unsure about the legality of the terms.

Step 4: Draft the Agreement

Using a Template:

  • Downloadable Template: [Link to Template]
  • Customization: Modify the template to fit specific terms.
  • Clarity: Ensure all terms are clearly stated.

Example: Modify the repayment schedule section according to the agreed terms.

Step 5: Review and Sign

Final Steps:

  1. Review: Both parties should thoroughly review the agreement.
  2. Clarifications: Address any uncertainties before signing.
  3. Signatures: Both parties sign the document, making it legally binding.

Real-Life Example: Jane and Tom reviewed and amended their agreement, ensuring both were comfortable with the terms before signing.


Creating a loan agreement between friends is crucial for maintaining relationships and ensuring legal protection. By following these steps and using the provided template, you can create a clear, fair, and legally binding agreement.

Additional Tips:

  • Record Keeping: Keep copies of the agreement for future reference.
  • Witnesses: Having a witness sign can add an extra layer of legality.
  • Amendments: Be open to modifying the agreement if circumstances change.

Frequently Asked Questions (FAQs)

1. What is a loan agreement between friends?

Answer: A loan agreement between friends is a written agreement between two parties where one party (the lender) agrees to lend a specific amount of money to the other party (the borrower) with the understanding that the borrower will repay the loan, along with any agreed-upon interest, at a later date.

2. Why is a loan agreement important between friends?

Answer: Having a loan agreement between friends is important because it sets clear terms and expectations for the loan, including the amount of the loan, the interest rate, the repayment schedule, and any other terms that may be relevant to the loan. 

This can help to avoid misunderstandings and disagreements between the lender and borrower in the future.

3. What should be included in a loan agreement between friends?

Answer: A loan agreement between friends should include the names and contact information of the lender and borrower, the amount of the loan, the interest rate, the repayment schedule, any collateral that may be used to secure the loan, and any other terms or conditions that may be relevant to the loan.

4. Is it necessary to have a loan agreement witnessed or notarized?

Answer: While it is not legally required for a loan agreement between friends to be witnessed or notarized, it may be a good idea to have the agreement signed in the presence of a neutral third party or to have it notarized. 

This can provide additional protection and evidence in the event that there is a dispute regarding the loan in the future.

5. What happens if the borrower is unable to repay the loan as agreed?

Answer: If the borrower is unable to repay the loan as agreed, the lender may take legal action to recover the debt, such as by hiring a collection agency or taking the borrower to court. 

In some cases, the lender may also be able to seize any collateral that was used to secure the loan.

6. Can a loan agreement between friends be cancelled or modified?

Answer: Yes, a loan agreement between friends can be cancelled or modified if both the lender and borrower agree to the changes. 

It is important to put any changes to the agreement in writing and to have both parties sign and date the revised agreement.