Have you ever wonder what protects the rights of the people when a loan is sanctioned? Without some kind of contract, a lender or a borrower might face issue after lending or borrowing money.
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The loan agreement is a contract that binds people into some kind of agreement to formalize a loan process. Loan agreements are of various types and each type of loan agreement is framed by following the state and the federal laws. The article below helps you to understand all the components of the loan agreement and its working:
A loan agreement is necessary before lending or borrowing money. The loan agreement details how much money has been loaned and the date by which the borrower must pay back the loaned amount. The loan agreement contains specific terms that mention the amount of money the borrower is required to pay back for the loan amount. Once the loan agreement is signed, the borrower is obliged to pay the lender the borrowed sum. The loan agreement also prevents illegal or excessive repayment of interest on the money borrowed thus safeguarding the borrower’s rights.
The loan agreement helps to safeguard the rights of both parties. A loan agreement assures the lender a guaranteed payback whereas it assures the borrower that no hidden charges or extra interest amount is levied on the borrowed amount. The loan agreement allows both parties to take legal steps in case of any discrepancy.
It is a legal document that is used as proof that the goods or the service rendered to the borrower is not a gift and must be repaid within the due date. Even if you are borrowing money from informal sources like friends or family, it is important to have a loan agreement to safeguard your rights and your valuable relationships. It is always better to draft a loan agreement to stay on the safer side while lending or borrowing money. It is worth your time as it can save you from any discrepancies later on.
The following segment shows the various sections contained in the loan agreement and what is enlists:
Each loan agreement lists out some specific details that are used as a guarantee that both parties have mutually agreed on the loan terms. On a loan agreement, you will have a section that enlists the borrower and the lender details. For individual borrowers/lenders, the details are listed about the individual, however, for a business entity; you will need to include the business entity’s details and its designation. You must also mention the full address and the number of lenders or borrowers.
Additionally, you must also specify the guarantor details in a separate section. A guarantor is a person who executes the loan along with the borrower. The guarantor is liable to pay back a loan if the borrower defaults. This section contains details about the number of guarantors along with their legal names and full address. If there are no guarantors you do not need this section in the loan documents.
Lastly, you need to include a section that specifies the date and location of signing the loan agreement. In this section, the details include the date from which the loan agreement is effective, the state where the agreement will be signed and the name of the country. This piece of information is necessary as it brings the loan agreement under the purview of specific laws of the nation.
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Once you have listed out the details of the people who are involved in the loan process, you must also outline specific details about the loan like transaction information, payment information, and the interest rate levied on the loan.
In the first section, you must include details about the money the borrower owes and how much he should repay. You must also enlist what the borrower gets in returns for paying back the sum of money.
In the payment section, you must mention details of how the loan amount will be repaid i.e. the EMI frequency. You must also include the acceptable payment methods like cash, net banking debit/credit card payment etc.
In the interest section, you will include the information regarding the interest levied on the borrowed amount. Mention the date from which the interest will accrue, whether simple or compound interest will be charged. Also, mention whether the interest rate is fixed or variable. If you are not charging interest then you can exclude the interest section. Also, include a section detailing the prepayment clause and the prepayment charges.
You may also ask for collateral as a security against any loan. If you have executed the loan by taking collateral then you must make sure to mention the terms of the collateral in your loan agreement.
Secured loans generally have a separate section in the loan agreements. Enlist the collateral that is accepted as security against the loan like property or the types of assets. You also need a separate section mentioning details of the security agreement in case of secured loans.
For non-secured loan, you may omit this section from your loan agreement.
There is an additional personal recourse provision to prevent the violation of the agreed norms. This provision will help the lender recover the borrowed amount through legal intervention or by taking possession of assets if the borrower violates the agreement.
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