Checklist: 5 simple steps to creating a loan contract that protects your interests

At Docue, we understand how important it is to crystalise loan terms with a robust loan contract - that’s why our Legal team have put together this 5-step checklist to create your own robust loan contract for an unsecured loan. This checklist breaks down the key elements you need to include, ensuring your loan contract is clear, enforceable, and protects both parties.

You can find a more in-depth breakdown of unsecured loan contracts and tips for drafting them in our comprehensive guide.

1. Specify the amount and the purpose of the loan

The first step in creating a watertight loan contract is to clearly outline the key details of the loan, including the loan amount and its intended purpose. Your loan contract serves as written evidence of the loan and the borrower’s agreement to pay it back, so ensure you’ve captured all of the important details. This confirms that the loan is to be regarded as a formal financial transaction rather than a gift or investment. Specifying the loan amount and the borrower's purpose will help to prevent misunderstandings later down the line.

2. Outline if the loan will be interest-chargeable or interest-free

Next, it's essential to clarify whether the borrower will be required to pay interest, or if the loan will be interest-free.

This section of your loan contract should clearly define:

• Interest rate: If applicable, specify the interest rate and how it will be applied.

• Late payment interest: You should also include a clause setting out the consequences of late payment. This setup ensures that the lender is compensated for any delay in repayment, with a higher interest rate applying to overdue amounts. interest on late payments to protect the lender's interests if the borrower misses a repayment. 

This section helps both parties understand the terms that the borrower has committed to, and the potential consequences for any delays in repayment.

3. Establish repayment terms

When loaning money, it’s important to agree on how you will be repaid. Without specifying this, it could be argued that the loan was a gift. For this reason, a crucial part of any loan contractis outlining how the loan will be repaid by the borrower. Whether the loan is repaid in a lump sum or through instalments, this section should be clear and detailed. Typically, the repayment section will include:

• Repayment schedule: Specify whether repayments will be made monthly, quarterly, or in one lump sum.

• Consequences of late payments: Detail any fees or interest that will be added if repayments are missed.

Including this information ensures that both the lender and borrower have a clear understanding of when repayments are due and what happens in case of default.

4. Include representations and warranties

If you are lending money, you will want to ensure that you feel comfortable with the borrower’s ability to repay the loan. Including representations and warranties from the borrower provides additional assurances to the lender.

This section may include key representations and warranties, such as:

• The borrower’s authority to enter into the agreement;

• Compliance with relevant laws and regulations;

• Confirmation that no other contractual obligations will interfere with the loan; and

• Assurance that no defaults are currently in place or will arise as a result of the loan.

Including these contractual promises helps to protect the lender by establishing clear expectations and legal protections. They provide the lender with a sense of security, knowing that the borrower has made specific promises about their ability and intent to repay the loan. They also offer reassurance that the borrower can honour the contract and offer recourse for the lender if any of these promises turn out to be untrue.

What are warranties?
A warranty is a contractual promise or assurance that is true at the date of the contract. If a warranty turns out to be untrue, the party receiving the warranty may be able to claim damages for breach of contract. However, a breach of warranty does not usually entitle the innocent party to terminate the contract. You can find out more about warranties by reading these FAQs.

5. Detail events of default

While both parties enter a loan contract with good intentions, a borrower may sometimes be unable or fail to repay the loan as agreed. To prepare for this possibility, your loan contract should clearly outline the consequences.

An event of default is a situation defined in the loan contract, that if occurs will allow the lender to demand immediate repayment, such as missed payments or insolvency of the borrower.

Clearly setting out events of default in your loan contract helps protect the lender’s interests, ensuring they can act swiftly if the borrower encounters financial difficulties.

Common events of default include:

• The borrower failing to make any payments due under the loan agreement;

• The borrower admitting an inability to pay debts or suspending payments;

• The borrower facing insolvency, such as a winding-up petition or the appointment of a liquidator or administrator; or

• The borrower ceasing or threatening to cease all or part of its business operations.

By defining these events in the loan contract, the lender has a legal right to demand repayment of the loan as soon as these risks materialise, reducing the chance of being left with unpaid debt. This clause provides peace of mind, knowing that the loan can be called in if an event of default is triggered.

Why choose Docue?

At Docue, we understand that creating a loan contract from scratch can feel overwhelming. That’s why our loan contract template simplifies the process by including all the key provisions necessary for a legally robust and enforceable contract. 

Professional: Our templates are drafted and maintained by qualified lawyers, so you can be confident that you have a professional-quality loan contract template at your fingertips, without the stress of drafting it from scratch.

Simple: Our loan contract template is easy to use and intuitive. Once you’ve answered all of the questions, you’ll have a simple loan contract that’s fully tailored to your needs.

All-in-one solution: When it’s finalised, you can send it for signature via Docue’s e-sign function, and store all of your documents in Docue Drive.

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