A Canadian Personal Loan Agreement is a legally binding contract between two individuals — a lender and a borrower — that formalizes a private loan of money. Unlike loans from banks or licensed financial institutions that are regulated under the Bank Act and provincial consumer protection legislation, personal loans between individuals are governed primarily by provincial contract law, the Interest Act (R.S.C. 1985, c. I-15), and the criminal interest rate provisions of the Criminal Code (R.S.C. 1985, c. C-46) section 347.

As of January 1, 2025, the criminal interest rate under section 347 was reduced from an effective annual rate equivalent to approximately 48% APR to 35% APR. This rate cap applies to all credit agreements, including personal loans between individuals, and includes all fees, charges, fines, penalties, and expenses in the calculation. Exemptions exist for commercial loans above CAD $10,000 (capped at 48% APR) and commercial loans above $500,000 (no cap), but these exemptions do not apply to personal loans between individuals.

A Personal Loan Agreement is more comprehensive than a simple IOU or promissory note. While an IOU merely acknowledges a debt and a promissory note creates a negotiable instrument under the Bills of Exchange Act, a Personal Loan Agreement provides detailed terms including repayment schedules, interest calculations, default provisions, security interests, prepayment rights, and governing law. For loans involving collateral, the lender may register a security interest under the Personal Property Security Act (PPSA) of the applicable province to protect their priority position in the event of the borrower's default or bankruptcy under the Bankruptcy and Insolvency Act (R.S.C. 1985, c. B-3).

A Canadian Personal Loan Agreement is essential whenever one individual lends a significant sum of money to another and wants comprehensive legal protection. This is particularly important for loans between family members, friends, business associates, or colleagues where the informal nature of the relationship can lead to misunderstandings about repayment terms.

Common situations requiring a Personal Loan Agreement include lending money for a home down payment, vehicle purchase, medical or dental expenses, debt consolidation, education costs, business startup capital, or emergency financial assistance. The CRA pays particular attention to loans between related individuals — documenting the loan in a formal agreement with commercial terms (including interest at or above the CRA prescribed rate) helps establish that the transfer is a bona fide loan rather than a gift or income splitting arrangement that could trigger the attribution rules under ITA sections 74.1 through 74.5.

A Personal Loan Agreement is also critical when the loan involves collateral. If the borrower offers personal property (a vehicle, equipment, jewelry, investments) as security, the agreement serves as the underlying security agreement for PPSA registration purposes. Without a written agreement, the lender has no documented basis to register a financing statement, and in the event of default, cannot establish priority over other creditors.

For interest-bearing loans, the Interest Act section 4 requires that the interest rate be expressed as a yearly rate. If a lender charges interest per month without expressing it as an annual rate, only 5% per annum may be recovered. A properly drafted Personal Loan Agreement ensures the interest rate complies with both the Interest Act and the Criminal Code s.347 cap of 35% APR.

A comprehensive Canadian Personal Loan Agreement must include clear identification of both the lender and borrower with full legal names and Canadian addresses. The loan amount must be stated in Canadian dollars (CAD), along with the date the funds will be advanced and the purpose of the loan. Documenting the purpose is important for CRA purposes — it helps establish whether the interest may be tax-deductible under ITA s.20(1)(c) (only if the borrowed funds are used to earn income from business or property).

Interest terms must comply with two key federal statutes. The Interest Act s.4 requires that all interest rates be expressed as a per-annum rate; otherwise, only 5% per annum is recoverable. The Criminal Code s.347 (effective January 1, 2025) caps the criminal interest rate at 35% APR, calculated to include all fees, charges, and expenses — not just the nominal interest rate. The agreement should specify whether interest is calculated as simple or compound, and if compound, the compounding frequency.

Repayment terms should define the structure (lump sum at maturity, fixed monthly instalments, or custom schedule), the maturity date, and the payment method. Include prepayment rights — whether the borrower can repay early without penalty, which provides flexibility. For secured loans, describe the collateral in detail and reference the lender's right to register a financing statement under the PPSA. The borrower should agree not to dispose of the collateral without consent and to maintain insurance.

Default provisions should specify the grace period for missed payments, late fees, acceleration clauses (entire balance becomes due), and the borrower's liability for collection costs. Include representations and warranties from both parties, a governing law clause specifying the applicable province, and an acknowledgment of the applicable limitation period. The agreement should be signed by both parties and retained for at least six years for CRA compliance purposes.