How to Write a Loan Agreement in England & Wales

Secured or unsecured?

An unsecured loan rests on the borrower's personal promise to repay; if they default, the lender's only route is to sue for the debt. A secured loan is backed by a specific asset the borrower charges to the lender, so on default the lender can enforce against that asset rather than joining the queue of the borrower's creditors.

Security is worth taking where the sum is significant. When the borrower charges an asset, the agreement should identify it precisely, stop the borrower disposing of it while the loan is outstanding, and confirm the lender may register or enforce the security on default. A personal guarantee is a different form of backing — covered below — where a third party rather than an asset stands behind the debt.

Interest: none or a fixed rate

A loan can be interest-free or bear interest at a fixed annual rate on the outstanding balance, accruing from the advance date until repaid. State the rate as a clear percentage per year and say that it runs on the reducing balance so the borrower knows what accrues as they repay.

You can also charge default interest on overdue amounts — a separate, usually higher rate that runs until arrears are cleared. Keep rates sensible: an excessive rate risks challenge as an unfair relationship under the Consumer Credit Act 1974, and a very high figure may not be enforced as drafted.

Adding a guarantor

A personal guarantee brings in a third party who promises to repay if the borrower does not. It is common when the borrower is a company or has a thin credit history, giving the lender a second person to pursue after a written demand, without having to enforce against the borrower first.

Because a guarantee is often given for no direct benefit to the guarantor, it should be executed as a deed so it binds without separate consideration passing to the guarantor. Make clear it is a continuing guarantee covering the loan and interest, and have the guarantor sign with an independent witness.

Executing the agreement as a deed

A straightforward loan can be signed as a simple contract: each party signs and dates it. But where the agreement grants security over an asset or includes a guarantee, it should be executed as a deed. A deed removes any argument about whether consideration was given and is the correct form for a charge or guarantee.

To be valid, a deed must say on its face that it is a deed, be signed by the party in the presence of a witness who also signs, and be delivered — it takes effect on the date it is dated. The witness should be independent (not the other party or a family member) and give their name, address, and occupation.

1. 1.Name the parties and state whether each is an individual or a business.
2. 2.Set the amount (in figures and words), the advance date, and any purpose.
3. 3.Choose interest-free or a fixed annual rate, and decide on default interest.
4. 4.Pick a repayment method: a single dated payment, monthly instalments, or on demand.
5. 5.Decide whether the loan is unsecured, secured on an asset, or backed by a guarantee.
6. 6.Execute as a simple contract, or as a deed with a witness where there is security or a guarantee.

The Consumer Credit Act 1974 trap

If a business lends to an individual, the loan may be regulated consumer credit under the Consumer Credit Act 1974. That can require FCA authorisation, prescribed pre-contract information, and specific formalities — going well beyond what a simple agreement provides, and getting it wrong can make the loan unenforceable without a court order.

Loans between two individuals, or between businesses, generally fall outside this regime, so this document suits those situations. Where a business is lending to a consumer, treat the agreement as a starting point only and take advice before using it.