Loan Agreement

A loan agreement is a contract between a borrower and a lender that defines each party's mutual promises. Loan agreements can range from basic promissory notes between friends and family to more sophisticated contracts such as mortgages, vehicle loans, credit cards, and short- or long-term payday advance loans.
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A loan contract's primary purpose is to specify what the parties involved are committing to, what duties each party has, and how long the agreement will continue.

Each type of loan arrangement and its repayment terms are controlled by both state and Indian rules intended to avoid illegal or exorbitant interest rates on repayment.

Regardless matter who receives the money, a loan agreement is required. Even if the loan is given to a friend or family member, a loan agreement is usually preferable. It acts as a legal instrument for resolving future issues between the borrower and the lender.

A loan agreement should include the following:
  • Loan Amount and Term: A loan agreement states the amount of the loan (also known as the Principal Amount) granted to the borrower. The loan is also given for a set amount of time, which is specified in the agreement.
  • Interest Clause: It specifies the interest rate to be paid by the borrower in addition to the principal. It also defines the punitive interest or extra penalties that must be paid if interest and principal are not paid on time.
  • Repayment Clause: It is the most important part of the loan agreement. This section defines how and when the borrower must repay the loan to the lender.
  • Prepayment Clause: Prepayment refers to the payment of a debt before the due date. Loan prepayment is typically permitted with the payment of penalty costs. The penalty is imposed to protect the lender from missing interest payments.
  • Loan security: A loan may be either secured or unsecured. In the event of a secured loan, some item, such as a home or vehicles, is often pledged as collateral for the loan. In the case of a default, the promised security can be used to recover the loan amount.

Benefits of Loan Agreement

Loan Agreement

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Frequently Asked Questions

Loan agreements benefit both borrowers and lenders for a variety of reasons. This legally enforceable agreement, in particular, protects both parties' rights if one side fails to follow the agreement.
Loan agreements are most often used for long-term loans, such as:
  • o Friendship or family loans are personal or private loans made between friends or family members.
  • o Large purchases, such as furniture or vehicles, are financed.
  • o Business or commercial loans, such as starting capital loans.
  • o Mortgages are examples of real estate loans.
A convertible loan is a loan which will either be repaid or, in most cases, converted into equity at a future date.
A subordination agreement is a legal document that establishes one debt as ranking behind another in priority for collecting repayment from a debtor. The priority of debts can become extremely important when a debtor defaults on payments or declares bankruptcy.
Collateral is usually a physical asset that can be seized and/or sold off by the lender to pay the remaining balance of the loan. A collateralized loan agreement allows a lender to take ownership of the property that was used as collateral and sell it to recover at least a portion of what the borrower was loaned.
Only the parties to the agreement need to sign the document and those signatures do not need to be witnessed. However, despite no witnessing requirement, it can still prove helpful in evidence if a dispute about the validity of the agreement arises.