Drawing up a private loan agreement is a crucial step in lending money to a friend, family member, or business associate. Whether it’s a small amount or a significant sum, a proper loan agreement helps to protect both the lender and borrower. An effective and legally binding private loan agreement must outline the terms and conditions of the loan and the obligations of both parties. In this article, we’ll guide you through the essential steps to drafting a private loan agreement.

1. Identify the Parties Involved

The first step of a private loan agreement is to identify the parties involved in the transaction. This section should include the legal names and addresses of both the borrower and lender, as well as the loan amount. You should also specify whether the loan is secured or unsecured.

2. Set the Terms and Conditions

The second step is to set the terms and conditions of the loan. This section should outline the interest rate, payment schedule, and the repayment period. If the borrower defaults on the loan, this section should also indicate the penalties and consequences of such an event.

3. Include the Payment Schedule

The third step is to include the payment schedule. This section should outline the specific dates and amounts of the payments. You should also specify the method of payment, such as check, bank transfer, or cash payment.

4. Specify the Use of Funds

The fourth step is to specify the use of funds. This section should indicate the purpose of the loan. For instance, if the loan is for business purposes, the agreement should outline the expected outcomes of the investment.

5. Add Security Measures

The fifth step is to add security measures. If the loan is secured, you should add a security agreement that outlines the terms of the collateral. You can use assets such as real estate, vehicles, or other valuables as collateral.

6. Include a Default Clause

The sixth step is to include a default clause. This clause outlines the conditions under which the borrower is considered to be in default, and the consequences of such a default. This clause should also specify the amount of time granted to the borrower to cure the default.

7. Get the Agreement Signed

The final step is to get the agreement signed. Ensure that both parties have read and understood the agreement, and sign the document in the presence of a witness. After signing, make copies of the agreement for each party.


Drawing up a private loan agreement is a crucial step in lending money to someone. A legally binding agreement helps to protect both the borrower and the lender in case of a dispute. Following the above steps will ensure that you have a well-crafted and effective agreement. Remember, a private loan agreement is not only a legal document but also a powerful tool that can help maintain good relationships.