Loan Agreements and Promissory Notes in Ontario

The terms “promissory note” and “loan agreement” are often used loosely, but they describe two somewhat different documents. A promissory note is typically a short, one-way written promise by a borrower to pay a stated amount to a lender, often by a fixed date or on demand. It’s simple by design — usually just the amount, the parties, a repayment date, and a signature — which makes it a popular choice for straightforward, lower-value personal loans.

A loan agreement is generally a fuller, two-sided contract. Beyond the basic promise to repay, it typically addresses interest, a repayment schedule, what counts as default, and sometimes security over a specific asset. The two aren’t mutually exclusive — a lender might use a promissory note as a standalone document for a simple loan, or attach one to a more detailed loan agreement as evidence of the underlying debt.

Which format fits depends mostly on the loan’s size and complexity. A small, short-term loan between acquaintances might reasonably use a one-page note, while a larger loan with interest, staged repayments, or collateral generally calls for the more complete structure a loan agreement provides.

Loans between friends or family members fail just as often as loans between strangers — informality doesn’t reduce the underlying risk, it just tends to remove the paper trail that would otherwise help sort out a disagreement. Money lent casually, with nothing written down beyond a text message or a verbal promise, often becomes genuinely contested once memories diverge about whether it was a loan, a gift, or something in between.

This is exactly the situation where a short, simple document earns its keep. A one-page note confirming the amount, the date, and the expected repayment terms costs little in effort or goodwill at the time the money changes hands, but can be the single most useful piece of evidence if a dispute arises months or years later.

Lenders in Ontario are generally free to charge interest on a loan, or to lend interest-free, as the parties agree. There’s an important federal limit on this flexibility, however: Canada’s Criminal Code sets a cap on what’s treated as a “criminal rate” of interest, calculated based on the true, effective cost of borrowing rather than just the stated rate. This cap has been set and adjusted federally, so rather than quoting a specific number here, the key point is that it exists and applies regardless of what the parties agreed between themselves.

A rate that crosses the federally set criminal rate cap can expose the interest arrangement — and in some circumstances the loan itself — to being challenged or struck down, independent of whatever the lender and borrower originally intended. This matters most for loans that bundle in fees, charges, or compounding in a way that pushes the effective rate higher than the headline number suggests.

For an everyday personal loan between individuals, interest is often modest or waived entirely, which keeps this issue largely theoretical. It becomes more relevant for private lending arrangements that charge a meaningful rate, where confirming how the effective cost of borrowing is calculated is a sensible step before finalizing the terms.

A loan agreement should set out exactly how repayment is expected to work — a single lump sum by a fixed date, a series of instalments, or payment on demand. Each structure suits different situations, and leaving this vague is a common source of later disagreement about whether a payment was actually “due” on a given date.

Default provisions describe what counts as a breach of the agreement — typically a missed or late payment — and what happens next. Many loan agreements include an acceleration clause, which makes the entire remaining balance immediately due once a default occurs, rather than leaving the lender to chase each missed instalment separately over time.

It’s also worth addressing grace periods and notice. A short cure period — giving the borrower a defined window to catch up after a missed payment before default formally kicks in — is common and can prevent a minor, one-off delay from immediately triggering the full weight of the default clause.

A loan can be unsecured, relying purely on the borrower’s promise to repay, or secured against collateral — a specific asset, such as a vehicle or property, that the lender can look to if the borrower doesn’t pay. Security gives a lender a more concrete fallback than an unsecured promise, though formalizing it properly, including registering an interest where applicable, usually takes more than a simple note.

Most informal personal loans between friends or family go unsecured, since the relationship itself is often treated as the real assurance. That approach carries more practical risk for the lender if the relationship or the borrower’s circumstances change, which is worth weighing honestly against the discomfort of asking for something more formal.

Where a loan is meaningful in size, pairing it with a basic form of security, or at minimum a clearly drafted agreement, gives the lender a stronger position if repayment becomes an issue — though the added formality is a trade-off against the simplicity that makes smaller personal loans easy to arrange in the first place.

Even a loan between people who trust each other completely benefits from a short written record. At minimum, this should include the amount lent, the date, whether interest applies and at what rate, the expected repayment schedule or date, and both parties’ signatures. None of this requires legal language — plain, clear sentences are enough.

It’s also worth noting what happens if the borrower can’t repay on schedule — whether late payments are tolerated, whether there’s a grace period, and whether missing a payment changes anything about the loan’s terms. Addressing this up front, while the relationship is still straightforward, avoids having to negotiate it for the first time in the middle of a dispute.

For related agreements where money or ongoing work is exchanged rather than a simple loan, our service agreement and independent contractor agreement guides cover the comparable terms worth getting in writing for those situations, and the broader agreements hub covers the full range of everyday contracts.

When a loan isn’t repaid as expected, the options available generally depend heavily on what was documented at the outset. A clear written note or agreement makes it much easier to establish the amount owed and the terms that applied, while a purely verbal understanding often turns a repayment dispute into a harder-to-resolve disagreement about what was actually promised.

Ontario’s general limitation period for most contract and debt claims is two years, generally running from when the missed payment or default was discovered, so delaying too long before taking action can itself become a problem. For smaller personal loan amounts, Ontario’s Small Claims Court is the forum most people use to pursue repayment.

A written demand for repayment is often a sensible first step before escalating further, since it formally puts the borrower on notice and creates a clear record of when the lender raised the issue. If you’re weighing next steps on an unpaid loan, our contact page and the tools hub point to further resources.