Whether you’re lending money or borrowing it, the process of loaning money is a big decision for everyone who is involved in the process. Misunderstandings and disagreements could arise that may eventually lead to a legal dispute. Whether you are doing the lending or the borrowing, it is always important to protect yourself from any form of loan altercation.
A Loan Agreement is also called a Loan Contract. It is usually used in the process of lending or borrowing money in order for both parties to outline the terms. Our loan agreement forms are printable and downloadable. You can choose from a wide array of our sample loan agreement templates which range from auto loan agreement contracts, to mortgage agreements, personal loan agreements, business loan agreement forms, and personal loan application forms.
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What Is a Loan?
A Loan is the act of lending money, property, or material goods to someone, which will then be repaid in the future along with an incurred interest. The person or the financier who is providing the loan is referred to as the lender, while the person who is lent the money to is referred to as the borrower.
When you are applying for loan through a bank or a loan agency, you typically have to go through an application process where an assessor will evaluate the purpose of the loan and the borrower’s capacity to pay it. Depending on the results of the financial assessment, a loan is then approved or declined. There are instances when this process is not followed, and it is only when the loan transaction only circulates within colleagues, friends and/or families. Hence, the procedure can be shortened and payment methods can be made in a setting that is less formal compared when the particular transaction is made with a bank or any other lenders.
Lending money is a risky business, regardless if you are loaning it to a complete stranger, a friend, or a family member. Because times are hard, you cannot really determine if the person you are lending money to can, in fact, pay you back. This is why having a written loan agreement is essential in order to protect the interests of both the lender and the borrower and to ensure that the money being lent was not a gift and should be repaid.
As a professional and formal transaction, loans must have an agreement or a contract. It is necessary for the terms & conditions, and obligations agreed upon by all the parties within the loan transaction to be specified in the loan agreement. As we have stated above, loan agreements that are written and recorded may not always be needed especially for transactions that are between relatives and friends. The decision on whether loan agreements or contracts shall be used will vary on the regulations followed by the lender and the discussion between the lender and the borrower.
Mostly, there is already a pre-arranged list of requirements that banks and organizations who provide lending services give to borrowers. This way, it will be easier for them to identify whether an individual is qualified for the loan or not. It is important for a borrower to submit the needed requirements as these items can showcase his/her reliability. The credit and current financial resources of an individual can also provide an impact on the approval of his/her loan, or the other way around. Some of the items that banks and lenders look at when approving a loan request are as follows:
- The creditworthiness of the borrower
- The character of the borrower through statements of references
- The borrower’s cash flow
- The collateral that a borrower can provide, when necessary
- The eligibility of the borrower to repay the loan
Once all these items have already been checked and a loan applicant has been deemed to be qualified for the loan, then a Loan Agreement is mostly likely to be processed for the approval of the terms by both parties. As a contract the binds the lender and the borrower, the information present in a loan agreement should be followed, honored, and implemented within the entirety of the agreement duration. As there are different kinds of purposes why loans are made, the content of loan agreements depend on its usage and the purpose on why it is needed for a specific time period.
When Is a Loan Agreement Used?
- When you are lending money to someone and would like to lay out the terms
- When you are borrowing money from someone and would like to outline the terms
- When you want to set out an amortization table in order to include an interest on a loan
- When you want to establish a payment plan for a loan
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Different types of loans call for different contents, different purposes, and different terms and conditions. For example, a Mortgage will have longer payment terms and prerequisites than an Auto Loan because they differ in value. The terms and conditions laid out for the repayment of a loan will also vary according to state laws or federal laws and guidelines that have been established. These laws were generally made and implemented in order to make sure that interest rates for repayments are not illegally or excessively charged. However, despite the varying types of loan agreement contracts, there are basic details that are usually incorporated in most of them, such as the following:
1. The amount of the money being lent or borrowed as well as the interest rate involved.
2. The payment plans and terms as well as the options for repayment.
3. The collateral involved to serves as security blanket for payment defaults.
4. Terms for payment defaults or penalties for late payments.
5. The name of the consignor for loans made by borrowers who have not yet established good credit.
When creating any form of loan agreement contract, its contents such as covenants, interest rates, terms and conditions, duration of the loan, and default terms need to be properly outlined in order to set proper expectations and avoid misinterpretations. If any of the parties has a question about a loan agreement’s clause, they should be brought forth prior to signing the contract.
Why Should You Have a Loan Agreement?
To Seal the Deal. Loan agreements provides the formal documentation of the obligations of the lender and borrower to each other. With a Written Loan Agreement, the transaction is ensured to be agreed upon by the parties involved.
Regulates Loan Terms. Loan agreements help to protect the interests of both the lender and the borrower. Aside from that, the protection and security of both parties in relation to the loan agreement must be based on the regulations followed in the location where the loan has been made. Remember that there are different rules and terms that are applied in loan transactions depending on the state where the agreement took place.
Serves as a Security Blanket. Both the lender and the borrower have responsibilities for each other. It is essential for the lender to provide the specified amount and ask for the repayment of the loan on the agreed upon dates. Borrowers, on the other hand, should make sure that they will give what they have promised when the time for repayment already arrived. Having a written loan agreement can help the lender and the borrower to stick to their obligations for the benefit of each other.
Outlines the Terms Precedent. One important thing that should always be present in a loan agreement is its terms. The conditions that the lender and the borrower should abide must be written in an understandable and precise manner to make sure that both parties are aware of the limitations and the scope of the agreement as well as the regulations that are within the transaction’s premise.
Physical Evidence. While having a written loan agreement is not mandated by law, it is more enforceable than an oral agreement because it serves as hard, physical proof that the parties to contract have come to an understanding and have agreed to the terms and conditions stated in the contract.
Typically, a loan agreement is created by the lender and signed by the borrower, because a borrower does not really have much of a choice now, does he? Therefore, it is typically a smart idea for the borrower to consult with a legal counsel before signing a loan agreement.
The Legal Provisions Incorporated in Loan Agreements
Though loan agreements do not necessarily require the usage of jargon and a lot of technical terms, there is still a need for the document to provide legal terms when specifying the provisions within the loan agreement. These terms should be used in their respective clauses especially on those where the duties of the lender and the borrower are discussed in details. Here are some of the legal provisions that are incorporated in a basic loan agreement:
Involved Parties. The specification of the involved parties is very important as this can serve as a basis for any legal transaction where the loan agreement may be used or presented. A simple discussion of the involved parties may include the following:
- The name of the lender and the borrower
- The permanent, current and mailing addresses of the parties
- The government identification numbers of the parties required for the transaction
- The contact details of the lender and the borrower
Choice of Law. Keep in mind that the inclusions of a loan agreement as well as the implementation of its regulations depend on the laws of the state where the agreement transpired. There are varying jurisdictions that are applied depending on the location of the transaction which has already been mandated long before the agreement has been done. Parties within the transaction should be well aware of conflicts of law as these can create differences on how the agreement can be executed accordingly.
Severity of Clause. When speaking about the clauses present in one loan agreement, both the lender and the borrower should be aware of the dependence of these clauses from one another. There are particular conditions where there are contract clauses that are not legally acknowledged but the rest of the paper has been approved and honored by the court. This means that the effective enforcement of the agreement does not only rely on the entirety of the document but also on the efficiency of its specific parts.
Entire Agreement Clause. The usage of an entire agreement clause is needed to specify that all the details discussed prior to the statement has been agreed by both parties. The information present in an entire agreement clause has the power to overrule any written or verbal agreement conducted prior to the actual negotiation.
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How Are Interest Rates Computed?
An interest is the additional amount that a borrower needs to pay when the loan is already needed to be repaid. As an amount on top of the money being borrowed, interest rates are computed based on the following:
- The kind or type of loan where the interest rate will be applied
- The borrower’s credit score
- The identification on whether a loan is secured or not
Secured loans are loans that are being backed by an asset which will serve as collateral for a loan. Collateral may be a house for a mortgage loan or a car for an auto loan. If you fail to repay the loan as initially agreed to in your loan contract, the lender can then repossess the collateral so that they can sell it our put it up for auction in order for the loan to be paid off. If the property that was repossessed does not sell enough to completely pay off the money being borrowed, the borrower has to pay off the difference.
If there are no assets that are involved in the transaction as a collateral, then it is an unsecured loan. Unsecured loans allow borrowers to have the money that they asked without the presence of collateral since most unsecured loans actually grant smaller amounts when compared to secured loans. Samples of unsecured loans include Personal Loans as well as Student Loans. Unsecured loans may be granted if the following minimum requirements are met:
- The borrower has a good Credit History
- The borrower currently has a steady and solid source of income
- The borrower has presented information that can support his/her ability to pay the loan
It is very important for the calculation or computation of interest rates to be as transparent as possible. Be reminded that there are limitations and other regulations that are implemented by law to ensure the protection of the borrowers. Legal matters like this depend on the state where the agreement has been done. For lenders to avoid legal issues, they need to make sure that they will not charge excessive interest rates in the loan agreements.
In terms of the duration of the loan and its payment schedules, a loan agreement should be able to specify details that can enlighten the lender and the borrower with regards this matter. The length of a loan agreement primarily depends on the amortization calendar that has been set for the loan. The first thing that the lender and the borrower needs to set is the amount of money that will be a part of the loan transaction. Once this has already been settled and agreed upon, the payment for the loan on a monthly basis should then be calculated. Using an amortization table should be a part of the process to ensure that the monthly payments and the interests are aligned with each other to complete the total amount that is needed to be given by the borrower at the end of the transaction. If you are a borrower, remember that the interest rate that you will pay in addition to the money that you have borrowed will depend on the duration that you are willing and obliged to repay the loan. Hence, the faster that you are able to pay, the lesser amount of money it is that you need to shell out. On the other hand, the longer the transaction is; the bigger your interest rate will be. With this, you need to watch out for certain loan agreement contracts that impose a pre-payment fee on borrowers who pay their debts earlier than scheduled.
Pre-payment fees are often created by loan agencies or banks to make sure that they are able to make a return of a loan within a specific duration of time. Pre-payment fees can be applied as follows:
- Pre-payment fees are commonly computed to be two to three percent of the actual amount due.
- Pre-payment fees can also be in comparison to the amount of an interest payment worth of six months.
In Federal law, any of the two pre-payment computations should not be a part of an agreement concerning an FHA loan. However, the exception on this is when a borrower agreed on a loan contract where his/her mortgage has a clause for due-on-sale. Be reminded that these items may vary depending on the country or state where you are living or where the loan has been agreed upon by both parties.
The dates where payments are expected to be given by the borrower should be honored accordingly. If a borrower decided to pay the loan past the specified dates, then he/she can actually be charged by the lender legally. Court litigation can be made depending on the decision of the lender especially if the payment has not been made for a long period of time already. The process of litigation will require a big amount of money and in this kind of transaction, the borrower will be responsible and accountable for the damages that it has done to the lender as well as the expenses attached in those damages. If a borrower does not have any money at hand, properties and other assets can be used to repay the loan.
What Is Mandatory Arbitration?
A mandatory arbitration is the process of resolving issues and different kinds of disputes between a lender and a borrower with the presence and help of an arbitrator. This is usually done if the parties do not want to bring the issue to the court so to avoid a bigger amount of money to be charged to arrange agreements about the disputes.
As a borrower you need to make sure that you have reviewed the content of mandatory arbitration in your loan agreement, if there are any. Most mandatory arbitration terms and clauses are in favor of lenders as these help them cut cost should legal matters arise. Moreover, having the finances to hire a legal counsel can also be of advantage to the lenders as they have higher chances of winning the discussion due to the wide range of knowledge that their counsels have with regards loan contracts and breach.
The process of a loan requires a ton of trust and dedication. It is integral that you have a loan agreement so that borrowers are not being charged with outrageously high interest rates and that lenders are ensured that they will be repaid for the money they have lent. A foolproof loan agreement contract is a good way to guarantee that there is o hindrance to creating 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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