Missed filing your ITR?

You can still file it on Cleartax in just minutes

Loan Agreement

By Mayashree Acharya


Updated on: Oct 12th, 2021


6 min read

social iconssocial iconssocial iconssocial icons

A loan agreement is a contract between the borrower and the lender stipulating the terms and conditions for the grant of loan to the borrower. A loan can be taken from a lending institution, friends, family member etc.

A loan agreement is essential irrespective of the fact to whom it is given. Even if the loan is given to a friend or a family member, it’s always better to have a loan agreement. It serves as a legal document for settling disputes that may arise between the borrower and the lender later.

Requirement of a Loan Agreement

The loan agreement provides details of how much loan is lent to the borrower and when the borrower needs to pay it back. The execution of the loan agreement acts as a promise to pay the loan amount from the lender to the borrower. Borrowing or lending money is a big commitment, thus it is important to protect both parties by executing a loan agreement. 

A loan agreement serves as proof that the money was given as a loan and not as a gift to the borrower. It prevents the borrower from trying to get out of repayment of the loan amount. It is necessary to execute a loan agreement even if the money is borrowed from a friend or family member. It is better to have a loan agreement to make sure that there are no disagreements or issues over the terms later on which could even ruin a relationship.

Contents of a Loan Agreement

A loan agreement contains the following information:

  1. Loan Amount and Duration: A loan agreement clearly specifies the amount of loan (also called Principal Amount) given to the borrower. The document also defines the time period for which the loan is granted.
  2. Interest Clause: It states the rate of interest to be paid along with the principal by the borrower. Also, it specifies the penal interest or additional charges required to be paid in the event of default in the payment of interest and principal.
  3. Repayment Clause: It is the major element in the loan agreement. This clause specifies how and when the loan is to be repaid by the borrower to the lender. The repayment can be a lump sum or on a periodical basis. In case of periodical payments, it should specify the number of installments due and the date when the installment becomes due.
  4. Prepayment Clause: Prepayment means early payment of loan i.e. payment before the due date. Prepayment of loan is generally allowed on the payment of penalty charges. The penalty is levied to protect the lender against the loss of interest payments.
  5. Loan security: A loan can be secured or unsecured. In case of a secured loan, generally, some asset, say house or vehicle is pledged as collateral for the loan. In the event of default, the security pledged can be used to recover the loan amount.

A loan agreement must be signed by both the parties (borrower and lender) in order to avoid any dispute that may occur later.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

Related Articles

Debt Settlement Agreement

What is a Secured Business Loan?

inline CTA
Get an expert at affordable price
For ITR, GST returns, Company Registration, Trademark Registration, GST Registration
About the Author

I am an advocate by profession and have a keen interest in writing. I write articles in various categories, from legal, business, personal finance, and investments to government schemes. I put words in a simplified manner and write easy-to-understand articles. Read more


Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use


ISO 27001

Data Center


SSL Certified Site

128-bit encryption