Why use this unsecured loan agreement template?
A verbal agreement may be enough to lend small sums to people you trust, but even among family and friends, a formal record of terms will prevent a disagreement later. Where you're loaning a significant amount of money or the risk of default is higher or the arrangement is more complicated, it is essential to record the arrangement in a legally binding contract like this one.
Why make an unsecured loan?
Where the purpose isn't important
An unsecured loan is often made for small, short-term expenses, such as for household purposes, medical crises or wedding or funeral costs. The purpose of the loan does not affect the terms and the lender may not be concerned with how the money is used.
For short term, flexible lending arrangements
Most unsecured loans are made for a short-term. They are usually intended to be repaid within about a year, though the terms can vary depending on the amount at issue and the relationship between the lender and the borrower. It is possible to lend for any amount of time, or even an unspecified term.
Where there is no need to charge property and possessions
Simplicity is another reason to seek an unsecured loan. When only small amounts of money are at issue, it is not usually worth the hassle of transferring property titles and establishing a collateral relationship. A simple contract may be the best way to proceed, even if there are negative trade-offs such as increased risk of non-repayment.
When a borrower does not have possessions or property worth charging, taking an unsecured loan may be their only way of obtaining a loan.
As little or as much interest as you require
There is no limit in law on the interest rate that the lender charges. Unsecured loans may have a higher interest rate than secured ones if the risk that the borrower defaults is higher.
We have provided for a greater rate of interest if the borrower falls behind with repayments.
When to use this unsecured loan agreement
This unsecured loan agreement template is commonly used in these situations:
- For lending money to a family member or friend
- For a loan by a shareholder to their company (instead of investing equity)
- For a loan by a business to an employee, director or other person
- For inter-company lending between subsidiaries in a group
The template can be used both to create a personal loan agreement for business to business lending arrangements. Both the borrower and the lender could be a private individual or a limited company (i.e. a pty ltd).
Either or both parties may be in the Commonwealth of Australia or abroad.
The loan amount could be for any value and the repayment terms could be of any complexity.
The agreement could be whatever you want to put in it, but we have provided a sound and comprehensive proposal containing options. It is supported by drafting notes so that you will know whether you can safely delete some provision. It is most unlikely that you will want to add new provisions, but if you do, it is easy. Our layout and use of plain English also make it very easy to edit by deletion.
The law relating to this agreement
This unsecured loan agreement template complies with the governing law of every state and territory of Australia. There is little statutory regulation relating to an agreement of this nature, so you can make, more or less, the deal you choose.
Drawn outside the National Consumer Credit Protection Act 2009, this agreement is not suitable for companies in the business of lending or providing credit to consumers. It does not provide the disclosures that the National Credit Code requires.
Net Lawman offers three loan agreement templates, with two versions of each: one for a company borrower and the other where the borrower is a person or partnership. The other templates include provisions for security and guarantor.
We do not provide a document suitable for charging real property (i.e. providing a mortgage) because such work is restricted by law to solicitors and licensed conveyancers.
Contents of this unsecured loan agreement
Important provisions of this unsecured loan agreement include:
- Structure of the loan
- Alternative draw down arrangements
- Provisions of information to lender
- Repayment and interest payment arrangements
- Method of payment
- Provision for default situations
- Borrower's warranties
- Other legal matters
Should I use an unsecured loan agreement or a secured one?
A secured loan is one where the lender may take possession of the borrower's assets (known as collateral) if the loan amount is not repaid. The collateral is usually specific assets such as a car (for example, for an individual) or products in stock (for example, for a business). Security provides an incentive for the borrower to repay the loan, and reduces the risk of the lender in case of default (because the lender can sell the secured assets to recover their money).
An unsecured loan is one where no collateral is given to secure its repayment. In many cases, these types of loans are considered higher risk, since the lender does not usually have any way of forcing the borrower to comply with the terms of the loan or make payments on time, short of legal action. For this reason, most unsecured loans carry relatively high interest rates and are often only available to those with strong credit scores.
Frequently unsecured loan agreements are used where there is a high level of trust between the lender and the borrower (such as where the loan is between two people who know each other well), or where one of the parties has an interest in the other (such as a loan by a shareholder to their company or to a director or employee by a business) or where repayment isn't crucial to the lender (such as a personal loan in a family situation).
Can this document be used to create a promissory note?
A promissory note is, as the name suggests, a promise to pay an amount of money to someone else on demand or at a set future date. It is a simple statement that acknowledges a debt and gives the condition under which it will be repaid. You could think of it as an IOU.
A loan agreement includes other terms between the signing parties, for example, determining what happens is the loan isn’t repaid as agreed and whether the debt can be transferred to any other party. As such, a loan agreement can be far more complex, giving either or both sides far more obligations and rights.
We would always suggest that if you can choose between using a loan agreement and using a promissory note, a loan agreement will give you far more legal protection. Both are just as legally binding as each other.
This document isn’t suitable to be used as a promissory note, but it can be edited for a simple loan.
What is a Division 7A loan agreement?
Division 7A (known as Div7A) is part of the Income Tax Assessment Act 1936. It aims to ensure that profits and assets of a company are not distributed without being assessable to income tax.
A Div7A loan agreement is one that is used to ensure compliance with the ITAA 1936 when a company loans money – whether to shareholders, directors, employees or other people who seek loans from the company.
What does the term drawdown mean in respect of a loan?
Drawdown is when the borrower asks the credit provider to advance the loan money to them. Most loans are drawn down completely in one go when the loan is first agreed. But it is possible to have a schedule of drawdowns that oblige the lender to pay the loan in instalments at set dates or to allow the lender to ask for instalments as and when they need them or according to other criteria.
Should I charge interest on a personal loan?
It is reasonably common for interest to be charged on a personal loan.
The reasons why you might charge interest on a personal loan include ensuring that the total amount lent does not devalue as a result of inflation over time, and giving the lender some sort of incentive to make the loan instead of using the money for another purpose.
Charging interest also has an advantage in that it reduces the risk that the capital is not repaid in full.
Should I still make a loan if the borrower has bad credit?
There is nothing preventing a lender from making a loan to someone with a bad credit score. The score is an indicator created by credit scoring companies that identifies when making a loan might be risky to the lender.
When the borrower has a high bad credit score, the lender might decide to make a secured loan instead of an unsecured loan, or to charge a higher rate of interest.
What is the typical payment schedule for a loan agreement?
Most loan repayments are made monthly, although it possible to agree any time period. Larger loans for longer periods of time tend to be paid back less frequently. Some loans are repaid in full on a particular pre-agreed date.
Within a loan agreement you can include a clause that allows the borrower to extend the loan repayment schedule, for example, if they are having difficulty making payments on time.
What is a guarantor clause?
A guarantor clause brings in a third party as a guarantor of the loan if the lender does not repay. The guarantor has the legal responsibility to make the payment themselves if the lender does not or cannot. Brining in a guarantor gives security to the lender, provided that the guarantor themselves is creditworthy.
Consequences of not paying the loan on time
Not repaying an instalment of the loan is known as defaulting. Within your loan agreement you can set the consequences of a default of the loan. They might include having to pay a higher rate of interest on the money owed or being required to pay any remainder back sooner.