What is a Personal Loan Contract?
A personal loan contract is a legal document guaranteeing repayment of a loan. The contract will include all of the necessary information about the loan, such as repayment terms and interest rates, among other details. A personal loan contract is signed by both the lender, which may be a financial institution or an individual, and the borrower.
In the case of a personal loan, the very nature of the loan means that it is money loaned to an individual or couple. When the personal loan is guaranteed to be repaid by two people, the loan is referred to as cosigned. Keep in mind when cosigning a loan for someone else that both parties are equally responsible for the loan; if one person stops paying, the other person is legally obligated to make the payments.
There is some specific information that is found on virtually every personal loan contract. This information includes the full names and addresses of all parties involved, the amount of the loan, the date the money is loaned, the interest rate applied to the money, the payment schedule and payment amounts, and the date that the loan is expected to be repaid in full. Personal loans frequently come from banks or other financial institutions, and are typically unsecured debt.
When a loan is unsecured, this means that there is no collateral associated with the loan, which could be taken if the loan was not repaid. With an auto loan, for example, if the loan is not paid, the car is repossessed. However, there is no such security with an unsecured personal loan. For this reason, interest rates on personal loans are often slightly higher than other types of loans. Other types of personal loans include secured loans, when something such as a car or home is offered as collateral, or a line of credit, which is similar to a credit card in that it is not necessary to use the entire credit limit. Each type will require a personal loan contract.
A personal loan might also refer to a loan given between two friends, or between two family members. It is always best to draw up a simple personal loan contract, even between friends, to ensure that there are no misunderstandings and that it is understood that the money is a loan, not a gift. Sample personal loan contracts can often be found for free online. Both parties should carefully read through the contract, and each should retain a copy until the loan has been paid in full, at which time both parties should again sign off that the loan has been repaid.
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