A loan agreement is a complex document used by a financial institution or bank to protect the lender and borrower. It is crucial to understand the agreement carefully not to leave out anything that can protect you during the loan lifetime. Before lending any amount to someone, it is important to know if you need a loan agreement to protect you if the borrower defaults. This agreement will help you to take legal action to have your money recouped. The agreement indicates what is being loaned and how and when the borrower should pay. The agreement has specific terms that indicate what is given out and what is expected in return.
Taking a loan is a big commitment; that’s why it is important to protect both parties with a written document for future reference. The loan agreement also shows that money was not a gift to the borrower and prevent the borrower from getting away from payment. It is also importants to find reliable loan companies.
Instances to Use a Loan Agreement
Generally, loan agreements have mutual benefits to both the lender and the borrower when money is being borrowed. It makes the process formal and produces positive results for all parties involved. Loan agreements are commonly used for loans to be paid at a later date like:
- Private loans between family members or friends
- Students loans
- Commercial loans, like capital for start-up companies
- The funding for large purchases like vehicles or furniture
Things Included in a Loan Agreement
The loan agreement usually includes key elements about the transaction, such as the:
- Amount of Loan
This is the amount of money that a borrower receives from the lending firm. It should be well captured in the agreement.
- Length of the Contract
The length of the loan life depends on the amortization schedule, which determines the amount payable by the borrower monthly. The amortization schedule is formed by dividing the loan amount by monthly payments that would need to be paid to settle the loan in full. The interest is then added to the monthly payments.
- Method of Payment
The payment method indicates how the borrower plans to pay the lender. It can be through:
- Regular payments over a specified time
- Regular payments meant for the principal and the interest
- Regular payment specifically for the interest
- One lump sum made on a certain date at the expiry of the contract term
- Interest rate
Interest is added to the loan by the lender. It is meant to cater to the risk of lending money to the borrower. The extra money charged on the loan is set at the contract signing and is subject to an increment of penalties if the borrower fails to make monthly payments in time. Additionally, the lending institution can charge compound interest where any other accumulated interest in the past is charged together with the principal amount. This results in an interest rate that increases over time.
- Repayment Schedule
The repayment schedule should also be included in the loan agreement. It exists in two types:
- Fixed-large loans like car loans generally use fixed-term loans. Payments in a fixed loan follow a schedule stated in the loan agreement and have a maturity date when the loan should have been fully repaid. In many cases, the purchase funded by the loan, such as a car or a house, acts as the security to the loan if the borrower defaults on payments. Some fixed loans allow the borrower to pay off the loan earlier without penalties, while others penalize for early payments.
- Demand. These are typically used for borrowing short-term loans of small amounts that do not require any collateral. This repayment schedule is used by close parties like family members or friends because they have a well-established relationship. Professional lending institutions such as banks also use demand loans to consumers with whom they have established a good relationship. The lender should give enough notice as agreed on the contract to demand repayment. The loan agreement generally gives details of the notification.
- Late Payments
A loan agreement will detail actions to be taken on the borrower if they fail to honor payment in time. Late payment is a breach of the contract and can also be considered a default, and the borrower can be held liable for any losses that the lender suffered because of it.
- Borrower and Lender details.
The agreement should contain the basic details of the lender and the borrower, such as their; names, contacts, physical addresses, and social security numbers. The borrower and lender can either be a corporation or an individual.
In conclusion, it is very critical to have a written agreement whenever taking a loan or lending out money.