Prior to entering into a loan agreement, the borrower must first make representations that prove his creditworthiness, the reliability of his character, his cash flow, or any form of collateral available to him that may be used as a security pledge for the repayment of a loan. As soon as the eligibility of the borrower is confirmed, a loan agreement is then created to formalize the transaction.
Loan agreements are written and legally binding contracts that signify the formality of the loan process. Loan agreement contracts vary according to use and purpose, the options of a written agreement could range from simple promissory notes between friends and family members to more elaborate contracts used for auto loans, credit cards, mortgage, etc.
Personal Loan Agreement Forms
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Standard Loan Agreement Form
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Vehicle Loan Agreement Sample
Personal Vehicle Loan Agreement
Vehicle Sale Loan Agreement
Free Vehicle Loan Agreement
Loan Receipt Agreement Forms
Loan Receipt Agreement Sample
Loan Against Trust Receipt Application Form
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Motor Vehicle Loan Hypothecation Agreement
Company Vehicle Loan Agreement
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Loan Repayment Agreement Form
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What Constitutes a Loan Agreement?
The terms and conditions laid out for the repayment of a loan will depend on the type of loan being made and should be based on laws and guidelines set forth by both the state and federal government to make sure that interest rates for repayment are not illegally or excessively charged. Below are the basic details that should be instilled in a loan agreement:
- The parties to the contracts and their addresses
- Definitions or interpretation provisions
- Facility and purpose of the loan
- Conditions pertaining to the use of the loan
- Repayment terms
- Terms of prepayment and cancellation
- Interest periods
- Payment terms
- Borrower representations
- Lender representations
- Borrower covenants
- Terms of default and remedying defaults
- Terms for penalties
- Terms for liquidated damages
- Formula for calculating payments, repayments, and interests
- Provisions set for lender’s fees
- Provisions for expenses
- Provisions for securitization
- Amendments and waivers
- Covenants pertaining to amendments of parties
- Clauses in the event of a set-off
- Counterpart clause
- Addresses for notices
- Provisions for language, forum selection, and choice of law
- Process agent options
When creating any form or type of loan agreement contract, covenants, interest rates, terms and conditions, duration of the loan, and default terms need to be properly detailed to avoid a disarray of facts or possible legal disputes.
Why Do I Need a Loan Agreement?
Defines Conditions and Obligations. Primarily, a loan agreement defines the terms and conditions that both the lender and the borrower have agreed to. This includes the responsibilities and obligations that each party is duty-bound to carry out for the whole duration of the contract.
Regulates Loan Terms. One other purpose of having a loan agreement is to protect the interests of both the lender and the borrower. Loan agreements should be in compliance with the regulations of the state and the federal government and should clearly define the exact purpose of the loan as well as the amount that is being lent.
Ensures Security of Repayment. Borrowing money is a huge decision to make and requires a big amount of dedication, which is why a loan agreement is useful in order to make sure that the lender and the borrower complete their end of the deal.
To Provide Definitions. A loan is defined as something that is borrowed. In terms of monetary loans, these are figures that are borrowed and repaid with interest. A loan agreement helps to set the line between a loan and a gift. It is important to acknowledge that the money given was borrowed and was not given freely.
Enforceable in Court. While having a written loan agreement is not mandated by law, it is more enforceable and tangible compared to a verbal agreement because it shows physical proof of the terms and conditions that have been agreed upon and signed willfully by both parties.
Legal Loan Agreement Example
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What Are the Legal Provisions Incorporated in Loan Agreements?
Because a loan agreement is legally binding, legal terms are involved in order to define the obligations of each party. Below are key terms that are typically incorporated within a loan agreement:
Involved Parties. This term refers to the borrower and the lender’s personal details such as their names, addresses, contact information, or social security numbers. The personal details of each party should be clearly stated in the contract.
Choice Of Law. Different states call for different laws. The laws being mandated in one state may not apply to another state, which is why it is extremely important that you are able to identify the jurisdictions of a particular state when drawing up your loan agreement contract. This term is also commonly called a Conflict of Laws.
Severability Clause. This term stipulates that the terms instilled within a contract are not dependent on each other and should not be taken as a whole. Therefore, if one condition of the contract is not acknowledged by a court, only that portion of the contract is unenforceable and not the whole agreement.
Entire Agreement Clause. The entire agreement clause is the final say to anything that was stated or written prior to it. This clause overrules any agreement that has been previously conducted in the negotiations, be it in written or in verbal form.
How Do I Determine the Interest Rates of My Loan?
Loan interest rates are determined depending on the type of loan being made, the credit score of the borrower, and if the loan is secured or unsecured.
Secured loans are loans that are being backed by an asset such as a house for a mortgage loan or a car for an auto loan. These assets will serve as your collateral for the loan – meaning that, if you fail to repay the loan as initially agreed in your loan contract, the lender can then repossess the collateral in order to sell it and pay off the loan. If the property being repossessed does not sell enough to completely pay off the money being borrowed, the borrower has to pay off the difference.
An unsecured loan, on the other hand, is money being lent without any assets to be seized. These types of loans are highly dependent on a borrower’s good credit history and a solid source of income in order for the lender to approve the loan application. Because of the lack of collateral for these types of loans, they are usually granted in small amounts. Examples of unsecured loans are personal loans and student loans.
In calculating the interest rates of each loan, a lender will typically require the interest to be tied to material assets that will serve as a collateral such as the deed to a property or the title of a car. It is important to note that legal limits and consumer protection laws have been set by the state and federal governments in order to regulate the interest rates being imposed in loan agreements to avoid charging illegal or excessive interest rates.
How Long Does a Loan Contract Last?
The duration of a loan agreement relies upon the schedule of amortization that has been set for the loan. As soon as the lender and the borrower have determined the amount of money that is needed, the monthly payment for the loan will then be calculated with the use of the amortization table. The amount of interest will then be added onto the monthly payments. Typically, the quicker a borrower pays off the amount of money being loaned, the lesser it will cost for him to pay off his debt because interest rates usually depend on the length of the loan.
However, while the goal of paying back a loan swiftly sounds like the best plausible way to get out of debt fast, borrowers need to be careful with some loan terms and conditions that have set an early pre-payment fee for borrowers. These usually occur in automobile or mortgage subprime loans as well as in refinancing a home or an auto loan.
A pre-payment fee is created for business purposes. This helps to ensure that the lender is able to make a return of a loan over a specific duration of time. A pre-payment fee is usually 2 to 3 percent of the amount due on the loan, or six months’ worth of interest payment. Federal law specifically prohibits pre-payment fees being charged on FHA loans, except when the borrower has a mortgage whose loan agreement contract contains a due-on-sale clause which has been allowed as a part of the mortgage. Pre-payment penalties are applied to protect the lender, who expects a certain return on his loan over a certain amount of time.
Business Loan Agreement Forms
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Internal Loan Agreement Example
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Home Loan Agreement Forms
Home Loan Agreement in PDF
Home Mortgage Loan Agreement
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Home Loan Agreement Sample
Printable Loan Agreement Forms
Printable Blank Loan Agreement
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Printable Personal Loan Agreement
What Happens if a Borrower Has a Payment Default?
A breach or a default in the payment of a loan can greatly damage a borrower’s good credit history – which will make it harder or impossible for him to make another loan. If a loan is paid off late, then this is considered to be a default and the borrower can face potential legal charges. If the lender decides to pursue the litigation in court, the borrower will be held accountable for the expenses made for liquidating damages. Assets and properties can also be taken as a form of repayment for the loan.
Should My Loan Agreement Contain a Clause for Mandatory Arbitration?
A lot of business owners usually opt to instill a mandatory arbitration clause into their contracts. Mandatory arbitration means that disputing parties should resolve their legal issues with the aid of an arbitrator instead of going to court.
Most lending agencies include mandatory arbitration in their loan agreements because it costs less and places the final decision in the hands of an experienced and knowledgeable person. However, in most cases, mandatory arbitration typically favors lenders who have hired counsels knowledgeable in areas pertaining to breach of loan contracts.
A loan transaction requires a huge leap of faith for the lender and a huge financial commitment from the borrower. It is important to draw up a loan agreement contract that protects the borrower in a way in which he is not outrageously charged with high interest rates that make it impossible for him to repay the lender, and to ensure that lender that a repayment is to be given back for the loan. A foolproof loan agreement contract is essential to make sure that miscommunication and misunderstandings do not get in the way of a smooth lending transaction. You can download our loan agreement forms or sample loan contracts to help you save on time and money.
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