A credit agreement example is a written contract between a lender and a borrower that names both parties, states the principal amount, sets the interest rate and repayment schedule, fixes a maturity date, and spells out what happens if the borrower defaults. For consumer loans, the lender must also attach federal disclosures showing the annual percentage rate, the total finance charge, and the total of all payments before you sign. The sections below walk through each part of a standard agreement so you can draft one, review one, or compare offers with a clear sense of what belongs on the page.
The Core Terms the Document Must Contain
Start with identification. The agreement should give the full legal name and current address of each party. Lenders also collect Social Security numbers or Taxpayer Identification Numbers because the IRS requires them on tax filings tied to the loan, such as interest income reporting or debt cancellation.1Internal Revenue Service. Taxpayer Identification Numbers (TIN)
Four financial terms need to be stated clearly enough that neither party can later claim confusion:
- Principal. The total amount of money the lender is providing. This is the starting balance before any interest accrues.
- Interest rate. Whether the rate stays fixed for the life of the loan or adjusts based on a benchmark like the prime rate. A variable rate provision should identify the index it tracks and any cap on how high the rate can go.
- Maturity date. The deadline by which the entire balance must be repaid. Missing this date usually triggers default provisions.
- Repayment schedule. How often payments are due, the dollar amount of each payment, and whether an amortization table splits each payment between principal and interest.
Income verification is not itself a term of the agreement, but regulated lenders generally require pay stubs or tax returns before extending credit to confirm the borrower can make the scheduled payments.
How the Interest Rate and APR Are Stated
The stated interest rate is only part of the cost. Federal law requires lenders to disclose the Annual Percentage Rate, which combines the interest rate with most fees charged as a condition of extending credit. Under the Truth in Lending Act, the finance charge includes interest, loan fees, points, credit report fees, and any insurance premiums the lender requires to protect against default.2Office of the Law Revision Counsel. 15 USC 1605 – Determination of Finance Charge The APR converts all of those costs into a single yearly rate so you can compare offers on equal footing.3Office of the Law Revision Counsel. 15 USC 1606 – Determination of Annual Percentage Rate
The agreement should also specify how interest is calculated. Most personal and auto loans use simple interest, where the charge is based only on the outstanding principal balance. Credit cards and some revolving lines of credit use compound interest, where unpaid interest is added to the balance and starts generating interest of its own. Over a long term, the difference between the two methods can be substantial at the same nominal rate. If the agreement is silent on the method, ask before signing.
State Usury Limits
Every state sets a maximum rate that non-bank lenders can legally charge. Caps generally range from about 6 percent to 28 percent depending on the state, the type of loan, and the borrower. A rate above the applicable state limit is usurious, and penalties can be severe, from forfeiture of all interest to voiding the loan entirely. If you are lending privately or borrowing from a non-bank source, check your state’s usury law before agreeing to a rate.
Default and Acceleration
The default clause is where the agreement gets its teeth. It lists every event that counts as a breach: missing a payment by a specified number of days, filing for bankruptcy, giving false information on the application, or violating a covenant such as taking on additional debt without approval. A well-drafted default provision leaves no ambiguity about what triggers it.
Paired with the default clause is an acceleration provision. It gives the lender the right to demand the entire remaining balance immediately instead of waiting for scheduled payments. From a borrower’s perspective, acceleration means that missing one or two payments can turn a manageable monthly obligation into a lump-sum demand for the full outstanding amount.
Include a governing law clause that names the state whose laws will apply if a dispute goes to court. Interest caps, statutes of limitations, and available remedies vary by state, so the choice of governing law can change the outcome of a dispute.
Prepayment Penalties and Late Fees
Some agreements charge a fee if you pay off the loan ahead of schedule. The lender’s logic is that it underwrote the loan expecting a certain amount of interest income, and early payoff cuts that short. Prepayment penalties typically run one to three percent of the remaining balance. Under Dodd-Frank rules, prepayment penalties on qualified residential mortgages are restricted, so they appear more often in commercial loans and certain non-qualified consumer loans. Where a prepayment penalty exists, check its expiration date. Many apply only during the first few years of the loan.
Late fees are the other common penalty the document should quantify. The agreement should specify how many days after the due date a payment becomes late (often 10 to 15 days) and the dollar amount or percentage the lender will charge. For consumer loans other than credit cards, late fee limits are set by state law rather than a single federal cap. An agreement that is vague about late fees is a warning sign.
Collateral in a Secured Agreement
When the loan is backed by collateral, the credit agreement either contains a security agreement or references a separate one. That is the document giving the lender a legal claim to specific property if you default. Under the Uniform Commercial Code, a security interest becomes enforceable only when three conditions are met: the lender has given value, the borrower has rights in the collateral, and the borrower has signed a security agreement describing the collateral.4Legal Information Institute. UCC – Article 9 – Secured Transactions
For personal property such as vehicles, equipment, or inventory, the lender typically files a financing statement with the Secretary of State to perfect the security interest, putting other creditors on notice of the claim. A purchase-money security interest in consumer goods, like furniture bought on credit, is automatically perfected without filing, but for commercial collateral the filing step is essential.5Legal Information Institute. UCC Financing Statement If you are the borrower, verify that the collateral description covers only what you intend to pledge. Overly broad descriptions can sweep in property you did not mean to put at risk.
Federal Disclosures That Attach to Consumer Agreements
The Truth in Lending Act exists to make sure consumers can see the true cost of credit before committing.6Office of the Law Revision Counsel. 15 USC 1601 – Congressional Findings and Declaration of Purpose For consumer credit not secured by real estate, TILA and Regulation Z apply to loans up to $73,400 as of 2026.7Consumer Financial Protection Bureau. Truth in Lending (Regulation Z) Threshold Adjustments Mortgages and other real-estate-secured loans are covered regardless of amount.
Before you sign, the lender must give you a disclosure that includes:
- Amount financed. The net amount of credit provided after subtracting any prepaid finance charges.
- Finance charge. The total dollar cost of the credit, described as “the dollar amount the credit will cost you.”
- Annual percentage rate. The yearly cost of credit expressed as a percentage.
- Total of payments. The full amount you will have paid once every scheduled payment is made.
These four figures must appear together in the disclosure.8eCFR. 12 CFR 1026.18 – Content of Disclosures If any are missing or buried in fine print, the lender is not meeting its obligations. Setting these disclosures side by side is the most useful thing you can do before choosing a lender.
The Cancellation Right for Home-Secured Agreements
If the credit agreement is secured by your primary home, you generally have three business days after signing to cancel, no reason required. The right of rescission applies to home equity loans, home equity lines of credit, and mortgage refinances. It does not apply to a loan used to purchase or build a new home.9Office of the Law Revision Counsel. 15 USC 1635 – Right of Rescission as to Certain Transactions
The three-day clock starts on the latest of three events: signing the loan documents, receiving the TILA disclosures, or receiving the notice of the right to rescind. If the lender never delivers the rescission notice, the cancellation window stays open for up to three years.10eCFR. 12 CFR 1026.23 – Right of Rescission Confirm that you received two copies of the rescission notice. That detail matters if you ever need to exercise the right.
Tax Provisions to Build Into a Private Agreement
Credit agreements create tax obligations that catch many borrowers and private lenders off guard. Two situations deserve attention before anyone signs.
Imputed Interest on Below-Market Loans
If you lend to a family member or friend at a rate below the IRS’s Applicable Federal Rate, the IRS treats the shortfall as “forgone interest.” The lender is taxed as though it received that interest, and the borrower is treated as though it was paid.11Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates Published AFRs change monthly and are broken into short-term (three years or less), mid-term (over three to nine years), and long-term (over nine years) categories.
An exception applies: if the total outstanding balance between you and the borrower stays at $10,000 or less, the imputed interest rules generally do not apply.12Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses Above that threshold, a private agreement should charge at least the AFR for the applicable term to avoid unexpected tax consequences on either side.
Cancelled Debt as Taxable Income
If a lender forgives $600 or more of debt, it must report the cancelled amount to the IRS on Form 1099-C, and the IRS treats the forgiven amount as taxable income to the borrower.13Internal Revenue Service. About Form 1099-C, Cancellation of Debt A borrower who negotiates a settlement for less than the full balance should budget for the resulting tax bill. Exceptions exist for insolvent borrowers and for debt discharged in bankruptcy, but those require separate filings to claim.
Signing the Agreement
A credit agreement becomes binding when both parties sign, whether on paper or electronically. Federal law provides that a contract cannot be denied legal effect solely because it was signed electronically.14Office of the Law Revision Counsel. 15 USC 7001 – General Rule of Validity Electronic signature platforms maintain a digital audit trail showing who signed, when, and from what device, which can be valuable evidence in a later dispute.
Notarization is not required for most credit agreements, but some lenders request it for high-value loans or when the agreement involves a security interest in real property. A notary verifies the signer’s identity, which makes a later forgery claim harder to sustain. Notary fees are modest, typically a few dollars to $25 depending on the state.
Once the agreement is fully signed, every party should get a complete copy. Digital copies stored in an encrypted location work as well as paper. What matters is that each party can produce the signed agreement and its associated disclosures if a question comes up later.
Modifying the Agreement Later
Terms that made sense at signing may need to change. Both parties can agree to modify the interest rate, extend the maturity date, or adjust the payment schedule, but the modification must be in writing. Oral promises to accept lower payments or waive a late fee are nearly impossible to enforce and create confusion about which terms actually govern the loan.
A written modification should include an integration clause stating that it supersedes any prior verbal discussions about the change. If the original loan is secured by real estate, the lender may also need to record a modification of the security instrument with the county to preserve its lien priority. Until the modification is signed by both parties, the original terms remain in full effect.
Keeping the Record
Regulation Z requires creditors to retain evidence of compliance with federal disclosure requirements for a minimum period after the disclosures are made, with longer retention for mortgage closing documents.15eCFR. 12 CFR 1026.25 – Record Retention Borrowers have their own reasons to hold onto records. Keep your copy of the agreement, all disclosures, and payment records for at least as long as the loan is outstanding, and for several years after payoff. If a dispute over the balance, interest charges, or payoff amount surfaces after the loan closes, your records are your best defense.