A Personal Loan Agreement is a legally binding contract between two individuals — a lender and a borrower — that documents the terms and conditions of a private loan. Unlike commercial bank loans, personal loan agreements govern money lent directly between people, such as friends, family members, colleagues, or acquaintances, without a financial institution acting as intermediary.

This document transforms what might otherwise be a casual verbal promise into an enforceable legal obligation. Under general contract law principles applicable in all 50 states, a valid personal loan agreement requires offer, acceptance, consideration (the loan amount), and mutual assent to the terms. Once signed, the borrower is legally bound to repay according to the specified schedule, and the lender has a cause of action in court if the borrower defaults.

Personal loan agreements also serve a critical tax purpose. Under Internal Revenue Code Section 7872, the IRS treats below-market-rate loans exceeding $10,000 as having imputed interest, potentially creating taxable income for the lender and a gift tax event. By documenting the loan with at least the Applicable Federal Rate (AFR) as the interest rate, both parties avoid unintended tax consequences. The IRS publishes updated AFR rates monthly, and failing to charge at least this minimum rate on loans over $10,000 can trigger scrutiny.

State usury laws impose maximum interest rate caps on personal loans, varying significantly by jurisdiction — from as low as 5% in some states to over 30% in others. Charging interest above the statutory cap can render the loan unenforceable and expose the lender to civil penalties.

When lending money to a friend or family member for a specific purpose such as a home down payment, vehicle purchase, medical expenses, or debt consolidation — any amount over a few hundred dollars warrants a written agreement to preserve both the money and the relationship.

When providing a colleague or acquaintance with a short-term bridge loan while they await a paycheck, insurance payout, or asset sale.

When a parent loans money to an adult child and needs documentation to satisfy IRS requirements under Section 7872, particularly for loans exceeding $10,000 where imputed interest rules apply.

When lending to someone who cannot qualify for traditional bank financing due to credit history, and you want to establish formal repayment terms with legal recourse.

When an existing informal loan needs to be documented retroactively because the relationship has changed or repayment has become uncertain.

Without a written personal loan agreement, the lender has virtually no legal recourse if the borrower stops paying. Courts require evidence of the loan terms, and verbal agreements are notoriously difficult to prove. The absence of documentation also means the IRS may reclassify the transaction as a gift, consuming the lender's lifetime gift tax exclusion.

Full legal names and addresses of both the lender and borrower, establishing the identities of the contracting parties. For married borrowers, consider whether both spouses should sign depending on your state's community property laws.

The principal loan amount stated in both numeric and written form to prevent disputes over the sum lent. Include the method of disbursement — check, wire transfer, or cash — and the date funds will be or were transferred.

The interest rate and calculation method — simple interest versus compound interest — along with confirmation that the rate complies with your state's usury laws. For family loans, charge at least the IRS Applicable Federal Rate to avoid imputed interest issues under Section 7872.

A detailed repayment schedule specifying payment amounts, frequency (monthly, quarterly, or lump sum at maturity), and the final repayment date. For loans exceeding $10,000, consider attaching an amortization table.

Late payment penalties and grace periods define consequences for missed payments. A typical late fee is 5% of the overdue installment or a flat dollar amount, with a grace period of 10 to 15 days.

Default provisions specifying what constitutes a default — missed payments, bankruptcy filing, death of the borrower — and the lender's remedies, including acceleration of the full balance.

Prepayment terms clarifying whether the borrower can repay early without penalty, which is standard for personal loans but should be stated explicitly.

Collateral description if the loan is secured, with sufficient detail to identify the asset (VIN for vehicles, serial numbers for equipment, legal description for real property).

Governing law clause identifying which state's laws control the agreement, and signatures of both parties with dates to confirm execution.