Summary. A loan agreement is a contract that records how much money a lender advances to a borrower, what interest applies, and how and when repayment happens. In Ontario, the safest loan agreements state interest as an annual rate, put security and guarantees in writing, and plan for default before the money moves. This guide explains the main types of loan agreements and the legal limits on interest in Canada.
A loan agreement is a written contract that sets out the terms on which one party lends money to another and how the borrower must repay it. It records the amount advanced, the interest rate, the repayment schedule, any security or personal guarantee, and what the lender can do if the borrower defaults.
You can lend money in Ontario on a handshake, but you cannot enforce a handshake with any confidence. Whether you are helping a family member, financing a customer, or borrowing to grow your business, the document you sign decides how much protection you actually have. This guide explains how loan agreements work in Ontario, what interest the law allows, how to secure repayment, and where private lenders and borrowers most often go wrong.
What Is a Loan Agreement?
A loan agreement is a legally binding contract between a lender and a borrower. The lender can be a bank, a private lender, a business, a family member, or a friend. The borrower can be a person or a corporation. Once both sides sign, the agreement gives the lender a contractual right to repayment on the stated terms and gives the borrower certainty about what those terms actually are.
Loan agreements appear in more situations than most people expect. Business owners sign them when they inject money into their own corporations. Parents sign them when they help adult children buy a home. Sellers sign them when they finance part of the purchase price on a business sale, an arrangement often called vendor take back financing that we cover in our guide to buying a business in Ontario. In every case the legal question is the same. What exactly did the parties agree to, and can they prove it?
The practical takeaway is simple. If money is changing hands and repayment is expected, a loan agreement should exist before the funds move, not after the relationship sours.
Why Should You Put a Loan in Writing?
Ontario law does not require most loans to be in writing. A verbal loan can be legally binding. The problem is proof. When a dispute reaches a courtroom, the judge needs evidence of the amount, the repayment terms, the interest, and the intention to create a loan rather than a gift. Without a document, that evidence usually comes down to conflicting memories and a bank transfer that could mean almost anything.
There is one major exception to that flexibility. Under Ontario’s Statute of Frauds, a guarantee is not enforceable unless it is in writing and signed by the guarantor. If you are counting on a third party to stand behind the borrower, a conversation is worth nothing.
In our practice, the hardest loan files are rarely the complicated ones. They are the ones where money moved electronically years ago, nothing was written down, and both sides now remember a different deal. A single page signed at the outset would have prevented the entire dispute.
Put every loan in writing, date it, and have both parties sign before the funds are advanced. Keep the signed copy together with your record of the actual transfer.
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What Are the Main Types of Loan Agreements?
Loan agreements are grouped by how repayment works and by whether the lender holds security. Most private loans in Ontario fall into one of the categories below, and many combine several features, such as a secured term loan supported by a personal guarantee.
| Type of loan | How repayment works | Common uses | Main risk to watch |
|---|---|---|---|
| Term loan | A fixed amount is advanced once and repaid on a set schedule with a final maturity date | Equipment purchases, business expansion, private mortgages | A schedule that ignores real cash flow leads to early defaults |
| Demand loan | The full balance becomes payable when the lender demands repayment | Family loans and shareholder loans | The loan can be called at a difficult time, and limitation deadlines depend on the demand |
| Revolving credit | The borrower may draw, repay, and draw again up to a set limit | Working capital and operating lines | Interest and fees grow quietly as the balance revolves |
| Secured loan | Repayment is backed by collateral such as equipment, inventory, vehicles, or land | Larger advances and business acquisitions | Unregistered security can rank behind other creditors |
| Unsecured loan | Repayment depends only on the borrower’s promise to pay | Smaller personal and business loans | The lender stands with ordinary creditors if the borrower becomes insolvent |
| Shareholder loan | A business owner lends to the corporation or borrows from it | Funding a startup or managing owner compensation | Poor paperwork creates corporate and tax problems later |
| Vendor take back loan | The seller finances part of the purchase price and is repaid over time | Business and property purchases where bank financing falls short | The seller carries credit risk on a business they no longer control |
Shareholder loans deserve special care because they sit at the intersection of contract law, corporate records, and tax. If you lend to or borrow from your own corporation, document the loan properly and keep it consistent with your minute book and any shareholder agreement already in place.
What Is the Difference Between a Loan Agreement and a Promissory Note?
A promissory note is a signed written promise by the borrower to repay a stated amount on stated terms. It is usually short, and often only the borrower signs it. A loan agreement is a fuller contract signed by both parties. It can deal with conditions that must be met before funds are advanced, ongoing obligations of the borrower, security, guarantees, events of default, and remedies.
The two documents often work together. In many business loans, the borrower signs a loan agreement that sets out the full deal and a promissory note that evidences the debt itself. For a small, simple loan between people who trust each other, a properly drafted note alone may be enough. One warning applies to both documents. The federal rules about how interest must be stated apply to promissory notes just as they apply to loan agreements, and a note that states a monthly rate without the annual equivalent runs into the 5% cap explained below.
| Feature | Promissory note | Loan agreement |
|---|---|---|
| Who signs | Usually only the borrower | Both the lender and the borrower |
| Length and detail | Short. The amount, the interest, the repayment terms and a promise to pay | Detailed. Conditions, covenants, security, guarantees, default events and remedies |
| Best suited for | Simple loans between parties who trust each other | Business loans, secured loans, and larger or longer arrangements |
| Security and guarantees | Rarely addressed in the note itself | Documented fully, together with registrations and signed guarantees |
| Value in a dispute | Proves the debt but can leave gaps a court must fill | Provides clearer evidence of the full bargain |
What Terms Should a Loan Agreement Include?
A loan agreement does not need to be long, but it does need to be complete. A complete agreement for an Ontario loan usually covers the following points, including but not limited to.
- The full legal names of the lender and the borrower, including corporate names where a company is involved
- The principal amount, the currency, and how and when the funds will be advanced
- The interest rate expressed as an annual rate, together with how interest is calculated and when it is payable
- The repayment schedule, the final maturity date, and how payments are applied between interest and principal
- Prepayment rights and any charge for early repayment
- Any security being granted and where it will be registered
- Any personal guarantee, signed and in writing
- Events of default, such as missed payments, insolvency, or a sale of the borrower’s business
- The lender’s remedies on default, including the right to accelerate the full balance
- Responsibility for legal, registration, and enforcement costs
- Governing law, notice provisions, and signatures for every party
Where a guarantee is involved, or where one spouse guarantees the debts of the other spouse’s business, the guarantor should receive independent legal advice. It protects the guarantor, and it protects the lender against a later claim that the guarantee was signed under pressure or without understanding.
Lenders sometimes ask for an indemnity instead of or alongside a guarantee, and the two are not the same document. Our guide to indemnity agreements explains the difference and when each one fits.
What Interest Rate Can You Legally Charge in Canada?
Two federal statutes control what interest you can charge on a loan in Canada, and both catch private lenders by surprise.
The first is the Interest Act. If your agreement says interest is payable but never states a rate, the rate is capped at 5% per year. The trap in section 4 of the Act is less well known. If a written contract other than a real property mortgage states interest as a daily, weekly, or monthly rate without an express statement of the equivalent annual rate, the lender cannot recover more than 5% per year no matter what the document says. A note charging 2% per month with no annual figure is a 5% loan in the eyes of the court.
The second is section 347 of the Criminal Code. Since January 1, 2025, it is a criminal offence to enter into, offer, advertise, or receive payment under an agreement that provides for interest above an annual percentage rate of 35%. The definition of interest is broad. Fees, fines, penalties, and commissions generally count toward the rate, so a loan priced at 30% plus heavy fees can still cross the line. Regulations create exemptions for certain commercial loans, summarized below.
| Loan situation | Limit that applies |
|---|---|
| Interest agreed but no rate stated anywhere | 5% per year under the Interest Act |
| Written contract states a daily, weekly, or monthly rate without the annual equivalent | Recoverable interest is capped at 5% per year |
| Most personal and private loans | Annual percentage rate of 35% under the Criminal Code |
| Commercial loans over $10,000 up to $500,000 made to a business borrower | Annual percentage rate of 48% |
| Commercial loans over $500,000 made to a business borrower | No cap under section 347 |
These figures are current as of July 2026, and the criminal interest regime changed as recently as January 2025, so confirm the rules before setting a rate. The safe practice never changes. State the rate as an annual percentage, count every fee when you price the loan, and stay well below the ceiling.
How Do You Secure a Loan in Ontario?
Security turns a promise into a priority. In Ontario, security over personal property such as equipment, inventory, accounts, or vehicles is governed by the Personal Property Security Act. The borrower signs a security agreement describing the collateral, and the lender then protects its interest by registering a financing statement in Ontario’s personal property registry. Registration can run from 1 to 25 years or be made perpetual, and priority between competing lenders generally favours the first to register. A careful lender also searches the registry before advancing funds to see what claims already sit against the borrower and the collateral.
Security over land works differently. A mortgage or charge is registered on title to the property, and the Interest Act contains separate disclosure rules for real property mortgages.
Personal guarantees are the third pillar. A guarantee must be in writing and signed to be enforceable in Ontario, and a guarantee from a corporate director is often the only meaningful recourse when the borrower is a small corporation with few assets.
In our practice, the most expensive oversight we see is a signed security agreement that was never registered. The paper exists, but when the borrower fails, the lender discovers it ranks behind every creditor who filed first.
What Happens if the Borrower Defaults?
Default rarely arrives as a surprise. Payments slow, communication thins, and then a payment is missed outright. What you do next, and how quickly, matters.
Start with the agreement. Confirm what counts as default, whether notice is required, and whether the full balance can be accelerated. A clear written demand usually follows, stating the amount owing and a deadline. Many defaults resolve at this stage through a payment plan or a restructured schedule, and a demand letter from a lawyer often changes the borrower’s level of attention.
If the loan is secured, the lender can enforce against the collateral, subject to the notice and process rules that protect borrowers. If the loan is unsecured, the remedy is a lawsuit. Since October 1, 2025, Ontario’s Small Claims Court hears money claims up to $50,000 excluding interest and costs, which covers many private loans through a faster and less expensive process. Larger claims proceed in the Superior Court of Justice. Our litigation team acts for lenders and borrowers in both courts.
Watch the clock. Ontario’s Limitations Act, 2002 generally gives you two years from the day you discovered the claim to start a proceeding, with an ultimate deadline of 15 years. Demand loans follow a special rule. The two years generally run from the borrower’s failure to pay after a demand is made, not from the date of the loan itself. A written acknowledgment of the debt or a partial payment made before the period expires restarts the clock. Miss the deadline and even a perfectly documented loan can become unenforceable.
How Should You Handle Loans Between Family and Friends?
Loans between family members and friends produce some of the most painful disputes we see, because the legal problem is tangled with the relationship. The most common fight is over whether the money was a loan or a gift. When nothing was documented at the time of the advance, an Ontario court must reconstruct the intention from bank records, messages, and testimony, and the outcome is genuinely unpredictable. It depends on the evidence, and the evidence is usually thin.
Three habits prevent most of these disputes. First, sign a short loan agreement or promissory note before the money moves, even for a loan to your own child. Second, if the money truly is a gift, record that too, because a signed gift letter protects everyone, and a child’s mortgage lender will usually require one when parents help with a down payment. Third, keep repayment records, because a pattern of payments is strong evidence that a loan existed.
Family loans also outlive the people who make them. An undocumented loan to one child becomes an estate dispute among all the children after the parent dies. A properly documented loan can be repaid, forgiven in the will, or treated as an advance on that child’s inheritance, whichever the parent intends. We cover these issues in more depth in our guide to business succession planning.
Interest on family loans is legal and follows the same limits as any other loan. Charging or waiving interest can also have tax consequences for both sides, so speak with your accountant before settling on a rate.
Frequently Asked Questions About Loan Agreements
Is a verbal loan agreement legally binding in Ontario?
A verbal loan can be binding, but proving its terms is difficult. A court needs evidence of the amount, the repayment terms, and the intention to create a loan rather than a gift. A personal guarantee must be in writing to be enforceable. A short written agreement signed before the money moves avoids almost all of these problems.
How long do I have to sue for an unpaid loan in Ontario?
Generally two years from the day you discovered the claim, subject to an ultimate deadline of 15 years. For a demand loan, the two years usually start when the borrower fails to pay after your demand. A written acknowledgment of the debt or a partial payment made before the deadline can restart the clock.
Do I need a lawyer to prepare a loan agreement?
No law requires it, but templates regularly fail on Ontario specifics such as how the interest rate is stated, how security is registered, and how guarantees must be signed. A lawyer also confirms the loan does not cross the criminal interest threshold once fees are counted. For significant amounts, drafting costs far less than a dispute.
What is the difference between a secured and an unsecured loan?
A secured loan gives the lender rights against specific collateral, such as equipment, inventory, or real property, and those rights are protected by registration. An unsecured loan relies only on the borrower’s promise to pay, so the lender stands with ordinary creditors if the borrower cannot pay or becomes insolvent.
Can I charge interest on a loan to a family member?
Yes. Family loans can carry interest like any other loan, subject to the same legal limits. Whether you charge interest or not, document the loan in writing, record the advance, and keep proof of payments. Interest can also have tax consequences for both sides, so ask your accountant before you settle on a rate.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
