The Importance of a Loan Agreement

Whether it is personal or business loan agreement, these documents are essential to protect the parties involved. While the specifics of each may differ, there are a few key components that should be included in all.

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These include borrower information, transaction details, payment information, collateral requirements and default penalties.

Borrower’s Information

Whether you are borrowing money from family and friends or getting a loan from a lending institution, a loan agreement is an important document to create. It removes ambiguity and protects both parties from hiked fees or missed payments. It also shows the IRS that the money is a loan, not a gift and makes it easier to negotiate if a dispute arises.

Generally, the document includes full information on both parties: their names, addresses, Social Security numbers (for individuals) and phone numbers. It also includes information on the amount of the loan, the term of the loan and the interest rate. It should also specify what constitutes default and the remedies available to the lender in the event of default.

It should also include any collateral requirements for the loan. And it should specify what state’s laws will govern the contract. Ideally, you should consult a business attorney to help draft the document. However, it’s possible to find templates online that you can use and customize to fit your needs. You can also contact your local Small Business Development Center for assistance.

Transaction Information

While different loans have a variety of specific details, most include certain standard terms that protect both parties. This includes information about who is lending and borrowing money, how much the loan is worth, an interest rate, payment plans, and what will happen if the borrower can’t pay back the amount borrowed.

Other terms to include in the contract are the effective date of the agreement, the choice of law (if laws in different jurisdictions apply to the loan) and a severability clause. This specifies that if any part of the contract is deemed unenforceable by a court, the rest of the contract will still be valid.

For larger business or personal loans, you may also want to include additional sections pertaining to things like synthetic lease obligations (obligations that do not appear on the balance sheet of the lender) and a default definition. You should also include a section to specify guarantors or successors who are responsible for paying the debt in the event of a borrower’s death. You may also want to include a signature section for all parties and a witness.

Payment Information

A loan agreement is a legal contract between the borrower and lender, so both parties should understand what is expected of them. Often, this includes positive covenants (what the borrower can do), negative covenants (what the borrower cannot do) and reporting requirements.

Besides the borrower’s information and transaction details, loan agreements need to spell out how the loan will be paid back. Typically, this will include the exact amount of money that is borrowed and the loan term, as well as how much interest is applied to the loan. If fees are charged for late payments or prepayment, this will be outlined as well.

In addition, the borrower and lender should outline what would happen if one of the provisions in the agreement is deemed unenforceable or invalid by a court. This will protect both parties from accusations of fraud or deception, and ensure that any legal action is based on the correct terms.

Collateral

Lenders often require collateral to reduce their risk in lending money. This collateral can include property such as a house or car, as well as financial assets like stocks and bonds. Typically, lenders will take possession of these assets if the borrower defaults on the loan.

Collateral can also be an important tool for borrowers who have difficulty getting credit because of poor credit or a short credit history. By offering collateral, borrowers can reduce the lender’s risk and qualify for a larger loan amount.

Whether you’re lending money to a friend or establishing a business relationship with a financial institution, it’s important to have an official loan agreement in place. This document will help prevent confusion and disagreements over terms later on in the relationship. The terms of the agreement should include information about the involved parties, including their names, addresses, Social Security numbers and phone numbers. The agreement should also address the type of loan, interest rate and repayment schedule. Depending on the type of loan, the agreement may also include sections addressing collateral and severability.

Breach of Agreement

A breach of agreement is a claim that one party did not honor its end of the bargain as set out in a contract. For example, a lender may claim that it has been breached by the borrower not making payments as agreed upon. A successful claim of breach of agreement requires a person to prove that there was an agreement, that the agreement included promises or stipulations, and that the other party did not live up to those promises.

In the case of loan agreements, covenants are the terms that expressly outline behaviors that a borrower must or must not engage in. These are usually documented in a document called a credit agreement or loan contract. Often, these contracts include a list of standard loan covenants that are standard for all borrowers and non-standard covenants that are unique to a specific borrower’s circumstances.

A breach of contract is a serious matter that can lead to litigation. In most cases, a party can recover damages for breach of contract. These can be a simple sum based on the amount that is owed, or they can be more complicated and include additional costs such as attorney fees.