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What Is A Loan Agreement?

A Loan Agreement is a legally binding contract that helps in defining the terms of the loan and protects both the lender and the borrower. A loan agreement will help set the terms in stone and protect the lender if the borrower defaults while it helps the borrower follow the agreement terms such as interest rate and the repayment period.

Most loans, often personal loans are often done on a verbal understanding. This puts the lender at risk and many have often experienced the drawbacks of this. This highlights the importance of having a loan agreement handy and involving in the lending process. Not only is a loan contract legally binding but it also safeguards the lender’s money during the loan repayment period.

What Does A Loan Agreement Consist?

Just like any legally binding contract, a loan agreement has certain terminologies that are sprinkled throughout the contract. These terms have their own purpose in the loan agreement and hence it is important to understand the meaning behind these terms while drafting or using a loan agreement.

Contact information

A loan agreement has the name and contact information of the borrower and lender.

Repayment options

While drafting the loan agreement, you have to decide on how you want the loan to be repaid. This includes the repayment date of the loan along with the payment method. You can choose between monthly installments or a lump sum amount.

Interest

With every loan, comes the interest. When it comes to a personal loan, if you don’t want any interest, the same has to be mentioned in the loan agreement. If you do want an interest then you need to mention how you want the interest to be paid and if pre-payment of the loan will come with any interest incentive or not.

Late fees and consequences of defaulting

Defaulting on a loan is a very real scenario, so is paying it back on a date later than the one that’s agreed upon. For this, you need to decide upon the agreeable ‘late payment’ date and the fees that come with it. In the case of a loan default, you need to define the consequences, such as ownership transfer of the collateral or whatever is mutually agreed upon.

Collateral

Collateral is the borrower’s asset that they use to secure a loan from you. The loan agreement has to mention the item that is being used as collateral, this typically includes any real estate, vehicles or jewelry.

Cosigner

For those who don’t have a good credit history or if you don’t trust them with your money as they have a higher risk of default, a cosigner is brought into the loan agreement. A cosigner agrees to take over the loan payment if the borrower defaults.