A loan agreement is a contract signed between two or more parties to formalize the giving or receiving of a loan. There are numerous types of loan agreements. The simplest form of these agreements is a simple promissory note between two close people. They can also be detailed ones such as auto loans, mortgage, and payday loans.
The loan agreement will always contain the conditions and terms for repaying the loan. State and federal law protect the agreements. There are also guidelines, which are designed to protect borrowers from excessive interest. If you are planning to sign a loan agreement, there are some things that you need to note. That way, the loan agreement does not end up being harmful to you as a borrower or a lender. Here are some things that the ideal template should contain:
The Yes and Nos of the the Right Loan Agreement: 8 Items It Targets
1. Yes: Terms of Default
Default occurs when the borrower fails to pay the interest on a loan when the payment is due. It is said to have occurred if the borrower is not able to keep up with their legal obligation under a loan agreement.
A good example of default is a borrower who does not make a monthly mortgage payment. When signing a loan agreement, the terms of default need to be made clear. The loan agreement must make it clear what kind of recourse the lender can take to recover their money. For instance, a mortgage lender may decide to reclaim the house to recover their money.
When a business declares bankruptcy, it means that it has defaulted on all loans and bonds. The creditors to the business will recover their money by claiming its assets. If there are leftover funds, bondholders get the remainder.
A lender and a borrower must both read the terms of default carefully. In some cases, the lender may not be able to reclaim their money. In other cases, the terms could be such that the borrower is not given a chance to continue making payments even after defaulting for just a day.
2. Yes: The Main Parties of the Contract
The aim of the loan agreement is to define the parties involved. It is important to make the parties identities as unambiguous as possible. It is thus important to get a lawyer to look at a loan agreement, especially where it involves huge sums of money.
For instance, if it is an agreement between two businesses, simply writing down the business’ name is not important. You need to go into detail and write down its full legal name. Besides that, you need to include a detailed location. Additionally, the names of those signing the agreement on behalf of the business need to be there.
In most cases, it is also advisable that as part of the agreement, their full addresses and their full legal names are visible. It is also important to include individually identifying information such as an ID number.
3. Yes: Terms and Conditions Within State and Federal Rules
When signing a loan agreement, it is essential to ensure that it adheres to states and federal laws. For instance, you cannot demand from a pound of flesh from a borrower in case they default. Besides that, the loan agreement cannot demand an unreasonable amount of interest on the loan.
When this happens, there is a good chance that the entire agreement could be declared null and void by a court of law. If that happens, recovering any money given to a borrower can prove to be impossible. It could even land you in legal trouble.
4. No: Arbitration Clause
When signing a loan agreement, ensure that it does not contain an arbitration clause. This is a clause which says that you cannot exercise any right and obligations under the contract. In short, you cannot sue the person issuing the loan if they decide not to live up to the terms of your agreement.
That is why you should always have a lawyer peruse over the agreement before signing it.
5. No: Liability Release
A liability release says that you cannot take legal action if they violate the terms of the agreement. For instance, if you need a loan to start a business that is to be released in parts, they could decide to stop releasing loans after the first payment.
Of course, this would be disastrous for your business. So, ensure there is no such liability release in a contract.
6. Yes: The Exact Jurisdiction of the Agreement Signing
This is especially important from loan agreements signed between parties from two different states. Laws regarding loan agreements vary by county, state, and at the federal level. You will need to make it clear under which legal jurisdiction you are signing the law. This is important in case the issue goes before a judge.
If the legal jurisdiction is ambiguous, one of the parties may decide to use that to your determent. It may seem like a minor detail but one of grave importance in any loan agreement.
7. Yes: Severability Clause
Sometimes, a party to the contract may not fulfill all their obligations. When this happens, one party will need to go to court have a part of the agreement enforced. However, this is not always possible in some cases.
The severability clause states that even when some parts of the courts cannot be enforced; it does not mean that all parts of the contract cannot. This protects parties from having the contract annulled because of a single unenforceable section in the contract.
8. Yes: Length of the Contract and Amortization
The duration of the contract usually depends on the schedule of amortization. Once the parties have agreed on the amount of money to be given out, the lender will calculate monthly payments and decide upon a period of repayment. In most cases, the faster the borrower can pay back, the less the interest they will owe.
A loan agreement is a legal document that contains many unique characteristics. The above are just a few of the most crucial ones that need to be there.
Always ensure the template you create has all of them.
Images from pixabay.com.