Personal Loan Agreement | State Usury Compliant

A personal loan agreement is a binding contract between a lender and a borrower who are individuals, not banks. It states the sum transferred, the repayment schedule, any interest, and the consequences of non-payment. Lawyers sometimes call the simpler version a promissory note, and the two overlap heavily. The practical difference is scope. A promissory note is a one-sided written promise to pay, useful for a single lump-sum repayment. A full loan agreement is a two-party contract that carries more machinery: covenants, default definitions, an acceleration clause, governing-law selection, and space for collateral. If your loan involves installments, interest, or anything that could go sideways, the agreement is the safer instrument.

The distinction that trips people up most is loan versus gift. When you hand money to a relative without a signed document and clear repayment terms, the IRS can treat the transfer as a gift, and a court may reach the same conclusion if you ever try to collect. A written agreement fixes the character of the transaction at the moment it happens: it shows an intent to be repaid, which is exactly what separates a recoverable debt from a generous mistake. Without that writing, the lender carries the entire burden of proving the money was ever a loan at all, usually from bank records and text messages that rarely tell a clean story.

Private loans in the United States sit at the intersection of state contract law and a handful of federal tax rules, with no single national statute governing them. Enforceability starts with the ordinary elements of contract: offer, acceptance, consideration, capacity, and a lawful purpose. Layered on top is each state's Statute of Frauds, the descendant of the English statute of 1677, which requires certain agreements to be in writing and signed to be enforceable. The provision that matters here is the one covering any agreement that cannot be performed within one year. A loan repaid over eighteen monthly installments falls squarely inside it, which means a verbal version may be unenforceable in court no matter how clearly both parties remember the deal. Case law softens this in places (partial performance and written evidence of an oral promise can defeat a Statute of Frauds defense), but relying on those escape hatches is a poor substitute for a signed contract. Our promissory note template with cosigner options covers the lump-sum variant of the same framework.

Interest is governed by state usury laws, which cap the maximum legal rate for a private loan. There is no federal ceiling, and the caps vary widely: some states set a general limit in the range of 10% to 18%, others tie it to a floating formula, and a few impose no general cap at all. Many states also draw a second, higher line for criminal usury. The penalty for crossing the civil cap is severe. A court may strike the interest entirely, and in some jurisdictions the principal itself becomes uncollectible. The safe practice is a modest rate comfortably below your state's limit.

Federal tax law adds one more layer through 26 U.S.C. §7872, which treats loans carrying interest below the Applicable Federal Rate as below-market loans and imputes the forgone interest for tax purposes. The Cornell Legal Information Institute's explanation of the below-market loan rules under Section 7872 sets out how the imputed-interest mechanism works. A genuine de minimis exception generally applies to gift loans of $10,000 or less between individuals, which keeps most modest family loans out of the imputed-interest machinery.

The most common trigger is a family advance for a major purchase: a parent covering part of a home down payment, or helping a child clear high-interest debt. These are the loans most likely to be recharacterized as gifts by the IRS, so documenting them matters more, not less, because the relationship feels informal. The second frequent scenario is a loan large enough to strain a friendship if it goes unpaid. A written agreement protects the relationship by removing the ambiguity that later becomes resentment. It fixes the amount, the due dates, and the plan if a payment is missed, so nobody is reconstructing the terms from memory a year later.

Seller financing is a third use. When someone sells a car, a piece of equipment, or a small business and lets the buyer pay over time, the loan agreement (often paired with a bill of sale for the underlying property) records the financed balance and the repayment terms. A fourth is any loan the lender wants to secure against property, where collateral changes the recovery strategy entirely.

Two edge cases deserve attention. A loan that doubles as estate planning (a parent lending to one child but not others) should be documented precisely, because heirs dispute undocumented advances constantly after a death. And an interest-free loan above $10,000 is not automatically safe: the IRS can impute interest even when you charged none, which is why the agreement should state the rate deliberately rather than leaving it blank.

• The identification of the parties lists the full legal names and current addresses of the lender and borrower exactly as they appear on government identification. Vague naming is a common reason collection actions stall, because a judgment has to name a real, locatable person.
• The principal and disbursement clause states the exact sum lent and how it was delivered, whether by wire, check, or transfer. Recording the method creates the paper trail that proves the money actually changed hands, which becomes the lender's core evidence in any dispute.
• The interest clause sets the rate in plain numbers and confirms it sits below the applicable state usury cap. It also addresses whether interest is simple or compounding, a detail that quietly changes the total owed over a multi-year term.
• The repayment schedule lays out the installment amount, the due date, and the final maturity date, or defines a single balloon payment where the whole balance comes due at once. Precision here is what turns a friendly promise into an enforceable timeline.
• The acceleration clause lets the lender demand the entire outstanding balance immediately after a missed payment, rather than chasing each installment separately. Without it, a lender may have to sue payment by payment as each one comes due.
• The default and remedies clause defines exactly what counts as a breach and what the lender may do next, from late fees to formal demand to litigation. It also names the governing state law and venue, which prevents a dispute from being dismissed on procedural grounds.

California codifies its usury rule in Article XV of the state Constitution, capping most non-exempt personal loans at 10% per year. The enforcement is unforgiving: a lender who charges above the cap can lose all interest, and willful violation can expose the lender to loan-sharking liability. California courts hold the lender responsible even when the borrower requested the rate and drafted the note, so the modest-rate rule is not optional here. A written agreement documenting a below-cap rate is the clean way to stay safe.

Texas regulates interest through its Finance Code, with a general usury ceiling of 10% for most private loans absent a specific higher authorization. The state's penalties for usurious interest are among the stiffest in the country, and the statute of limitations on a written contract runs four years from the date of default or last payment. A lender relying on an old, undocumented advance can find the claim time-barred before ever filing.

Florida sets its civil usury limit at 18% for loans of $500,000 or less under Chapter 687 of the Florida Statutes, with a higher criminal-usury threshold above 25%. Interest charged over the civil cap is generally forfeited, and the borrower may recover penalties. Florida's five-year limitation period on written contracts gives lenders a longer collection window than many states, but the clock still runs from default.

New York distinguishes sharply between civil and criminal usury, capping civil interest at 16% and criminal usury at 25% under its General Obligations Law and Penal Law. Loans that cross the civil line can be rendered void, meaning the lender may lose both interest and principal, a harsher consequence than most states impose. For any New York loan between individuals, keeping the rate well under 16% is essential. A properly drafted power of attorney is sometimes paired with a loan when one party manages the other's finances.

You start by naming the lender and the borrower using their full legal names and current addresses, matching government identification so the document holds up if it ever needs enforcing. From there you enter the principal, the amount actually being lent, and confirm the disbursement method. The form then asks whether interest applies. If it does, you set the annual rate, and the template flags that the figure should stay below your state's usury cap, so you set it deliberately rather than guessing. Next you choose the repayment structure, either regular installments with a fixed due date or a single balloon payment at maturity, and you enter the schedule that matches the plan both sides agreed to.

The later fields handle the protective machinery: late fees, the grace period before a payment counts as missed, the acceleration trigger, and whether the loan is secured by any collateral. You select the governing state, which anchors the enforceability and usury analysis to the right jurisdiction. Once every field is complete, you download the finished agreement in Word if you expect to make edits or in PDF for signing. Both parties sign and date, and each keeps an original copy. For loans backed by property, the affidavit and sworn statement templates in our personal collection can support the record.

The single most damaging mistake is skipping the writing altogether and lending on trust. It feels natural among family, but it leaves the lender proving the loan existed from fragments of bank statements and text threads, and it opens the door to the IRS treating the whole thing as a gift. Nearly as common is leaving the interest rate blank on a large loan, which does not make the loan tax-neutral: above the $10,000 threshold, forgone interest can be imputed under §7872 even when you genuinely charged nothing. Setting a small explicit rate is cleaner than pretending interest does not exist.

A third recurring error is charging a rate that quietly breaches the state usury cap, which can strip the interest and, in some states, the principal too. Lenders also forget the acceleration clause and then discover they must chase each missed installment separately instead of demanding the full balance at once. Finally, many people let the statute of limitations lapse, waiting years to act on a defaulted loan until the debt is legally time-barred. The window is typically three to six years from default, and it does not pause because the borrower is a relative. Document the loan, set a lawful rate, and act on a default while the claim is still alive. Our everyday personal legal documents catalog collects the related templates families use most.