Do I really need a loan agreement?

TLDR: If money’s changing hands and you’d want it back, you need a loan agreement. A verbal loan can be legally valid, but proving it is the hard part – and that’s exactly when arguments happen. A written loan agreement sets the terms, makes the loan enforceable, and saves everyone a world of pain if things go wrong. Here’s when you need one and what it should cover.

In Queensland, people lend money for all sorts of reasons – a loan to a business partner, money fronted to a mate, a director lending to their own company, a vendor finance arrangement on a sale. The amounts can be serious. The paperwork, more often than not, is non-existent.

So do you actually need a loan agreement? Let’s break it down.

Is a verbal loan even legal?

Yes – a verbal loan can be a legally binding contract. The catch is enforcement. If the borrower says “that was a gift” or “we agreed I’d pay it back next year, not now”, how do you prove otherwise? Text messages and bank records help, but they’re a weak substitute for a clear written agreement. When money’s on the line, “legally valid but impossible to prove” isn’t a position you want to be in.

What happens without a loan agreement

When there’s nothing in writing, you’re exposed to some classic problems:

• Disputes over the terms. Was there interest? When was it due? Nobody can agree, because nobody wrote it down.
• The “it was a gift” defence. Without proof it was a loan, you may struggle to get your money back at all.
• No security. If you didn’t document security over an asset, you’re an unsecured creditor – last in line if the borrower goes under.
• Tax and accounting headaches. For business and related-party loans, your accountant will want it documented properly.

When you definitely need one

You should get a written loan agreement when:

• The amount is significant enough that losing it would hurt.
• The loan is between a business and its directors or shareholders, or between related companies.
• You want the loan secured against property or another asset.
• It’s a vendor finance or deferred-payment arrangement.
• The repayment terms are anything more complex than “pay me back whenever”.

Honestly, the bar is low. If you’d be upset not to get the money back, write it down.

What a loan agreement should cover

A solid agreement spells out the loan amount, whether interest applies and at what rate, the repayment schedule (or that it’s repayable on demand), what counts as a default and what happens then, and whether the loan is secured. For secured loans, that usually means a registered mortgage or other security documented alongside the agreement.

Get it drafted properly

You can find templates online, but a generic template won’t reflect your situation – and a poorly drafted agreement can be worse than none at all. We’re a Queensland law firm, so your agreement is drawn up by real solicitors who’ll make sure it’s clear and enforceable.

At the time of publishing this article, a standalone loan agreement is $2,000, or $2,200 plus lodgement fees if you want it secured with a registered mortgage. Already been handed an agreement to sign? We’ll review it for $1,200 to $1,500 depending on length and complexity, and tell you in plain English what you’re agreeing to.

Talk to us about a loan agreement – it’s a small cost for a lot of peace of mind. Lending to a family member? See our guide on lending money to family.

Do I need a loan agreement: FAQs

Is a verbal loan agreement legally binding in Australia? It can be, but it’s very hard to prove. A written agreement removes the doubt about the terms and that the money was a loan, not a gift.

What happens if there’s no loan agreement and the borrower won’t pay? You can still try to recover the money, but without written terms you’re relying on bank records, messages and recollections – which makes it slower, harder and more expensive. Many disputes come down to “loan or gift”, and that’s exactly what a written agreement settles.

Can I just use a free template online? You can, but a generic template may not suit your situation and a badly drafted one can cause more problems than it solves. For anything significant, it’s worth having a solicitor draft or review it.

Do business or director loans need a written agreement? For tax, accounting and to avoid disputes, yes – related-party and director loans should always be documented properly.

How much does a loan agreement cost? A standalone loan agreement is $2,000, a mortgage-linked agreement is $2,200 plus lodgement fees, and advice on an existing agreement is $1,200 to $1,500 depending on complexity.

Can you act for both the lender and the borrower? No – we only act for one party to avoid any conflict of interest. The other side should get their own independent advice.