What loan agreement means
A loan agreement writes down the whole arrangement, not just the amount.
It names the lender and the borrower, states the principal, sets the interest rate and how it is calculated, fixes the repayment schedule, describes any security, and says what counts as default and what the lender may do about it.
That last part is what separates it from a casual arrangement. Most people lending money think about the amount and the date. The agreement is where you decide, calmly and in advance, what happens on the day the date passes and nothing arrives.
It is a contract like any other, so it needs the ordinary ingredients: parties who can contract, agreement on the terms, and consideration, which here is the money on one side and the promise to repay on the other.
How it is used
It runs from the very small to the very large, and the structure barely changes.
A business borrowing working capital from a supplier or an investor. A director lending money into their own company. One friend lending another two million naira for a project. A cooperative lending to members. A bank lending to a company, though there the bank brings its own document and the negotiation is about the terms rather than the drafting.
A workable agreement covers the principal, the interest rate and whether it is flat or reducing balance, the repayment schedule with dates and amounts, any grace period, late payment consequences, any security or guarantee, what events amount to default, how notices are given, which law applies and how disputes are resolved.
Sign two copies, have them witnessed, and give the borrower one. A lender holding the only copy is a lender with an argument coming.
Key features
- Signed by both lender and borrower, unlike a promissory note
- States principal, interest, repayment schedule and duration
- Defines default and the lender's remedies
- Can attach security, a personal guarantee, or both
- Attracts stamp duty as an instrument, and stamping avoids evidential problems later
- Can be secured or unsecured, and the difference decides what you recover
How this works in Nigeria
Interest is where Nigerian lenders get careless. State the rate, state whether it is per month or per annum, and state whether it is flat or on a reducing balance. A rate written as five percent with none of that specified is an invitation to a dispute, and courts will not invent the missing terms for you.
Security has to be perfected to be worth anything. A charge over company assets needs to be registered at the CAC within the statutory period, and a mortgage over land needs the state consent and registration. Security that was agreed but never perfected regularly turns out to be worth nothing at the moment it is needed.
Courts enforce loan agreements readily, and there are procedures for undefended money claims that suit a clean document. What holds lenders back is almost never the law. It is that nothing was written down.
Family and friend lending is where the most money is lost in Nigeria, precisely because writing it down feels like an accusation. It is not. It is the thing that lets the relationship survive the repayment.
Loan agreement vs promissory note vs personal guarantee
Three documents that often appear together and do different jobs.
A loan agreement is the full contract, signed by both sides, covering interest, schedule, security, default and remedies. Use it wherever the money is significant or the repayment is staged.
A promissory note is a one sided promise to pay a fixed sum on a date, signed by the borrower alone. It is shorter, it is enforceable, and it suits simple debts with a single repayment.
A personal guarantee is a third person stepping in. The guarantor promises that if the borrower does not pay, they will. It sits alongside the loan agreement rather than replacing it, and it is what a lender asks for when the borrower is a young company with no assets.
A cautious lender to a small company takes all three: the agreement with the company, a guarantee from the directors, and security where there is anything worth securing.
Limits and risks
An agreement does not create money. If the borrower has nothing when the date arrives, you hold an excellent document and an empty account. Security and guarantees exist because of exactly this.
Unsecured lending ranks behind secured creditors and behind tax and employees if the borrower is a company that fails, which in practice often means recovering nothing.
Enforcement takes time. Even a straightforward claim moves at the pace of the court, and the cost of recovery can consume a meaningful share of a small debt.
And limitation periods apply. A loan left unenforced for years can become statute barred, so a lender who keeps giving the borrower more time without documenting it is quietly weakening their own position.
Worth knowing
Write down the rate, the period it applies to and the basis in one sentence, for example two percent per month on the reducing balance. Most Nigerian loan disputes that reach court are not about whether the money was lent. They are about how much interest had accrued.
Questions people ask
What should a loan agreement include?
The names of both parties, the principal, the interest rate and how it is calculated, the repayment schedule, any grace period, what happens on late payment, any security or guarantee, the events of default, and how disputes are resolved.
Is a loan agreement legally binding in Nigeria?
Yes. It is an ordinary contract and Nigerian courts enforce it, and a clear signed agreement is well suited to the procedures available for undefended money claims.
What is the difference between a loan agreement and a promissory note?
A loan agreement is signed by both parties and covers interest, schedule, security and default. A promissory note is a one sided promise by the borrower to pay a fixed sum on a date. Use a note for simple debts and an agreement for anything structured or secured.
Do I need a witness for a loan agreement?
It is not strictly required but it is sensible. Two witnesses with names, signatures and addresses make the document far harder to dispute, and cost nothing.
Should I charge interest when lending to family?
That is your call, but say so either way in writing. Silence about interest is the most common source of family lending disputes, because each side later remembers the conversation differently.
What is security on a loan?
An asset the lender can look to if the borrower does not repay, such as a charge over company assets or a mortgage over land. Security only works if it is properly perfected, which means registering it at the CAC or the lands registry as required.