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Purpose of Loan Agreement

Getting a loan either from bank or friend involves various intricate issues. This article will helps you to determine a few complex issues in drawing a loan agreement.

Loan Agreement

Introduction
When a business or company is either starting up or wishes to expand, it likely requires additional money or capital. Additional funds can be obtained from either a bank or a third party willing to loan the money to the business. Where money is loaned to a business, the lender will want to have the borrower sign a loan agreement that details certain key issues regarding the loan.
In other cases, an individual may want to lend money to another individual for personal reasons (eg. to help a person buy a car or pay for university).

Definition
Loan agreements are binding contract. It contains all the terms and conditions under which the lender will lend the borrower the money. It states the amount of the loan, when the amount will be lent, the tranches if the money is to be lent in amounts at different dates, the repayment schedule, the interest to be paid by the borrower, and other conditions, terms, and warranties required by the lender from the borrower.
A Loan Agreement covers many of the same points as a Promissory Note; however, it is a lengthier and more complicated document and covers a more complicated transaction.

Purpose of a Loan Agreement
A loan agreement is used for the following purposes:

• Individuals or corporations can prepare a loan agreement to lend or borrow money.
• Shareholders can use it to borrow money from the corporation in which they have invested.

The main purpose of a loan agreement is to clearly define what both parties are agreeing to in terms of establishing the working relationship and what responsibilities each party covenants to perform for the duration of the loan.

Types of Loan Agreement

Secured Loan Agreements
A secured loan agreement is a note that is backed up by collateral. Should the loan go into default, the lender is entitled to seize the asset pledged as collateral as a means of repayment.
Non Recourse Loan Agreements
A non recourse loan usually includes collateral, but protects the borrower from being pursued by the lender for compensation beyond the pledged asset in the event of default. If the value of the collateral does not cover the amount of debt outstanding, the lender has no further recourse.

Governing Law for a Loan Agreement
The governing law is the law of the jurisdiction in which the Loan Agreement will be entered into. Often the parties select the jurisdiction where the Lender resides. If the Loan Agreement relates to the purchase of certain assets, then the location of those assets is selected.

What is interest?
Interest is an amount charged to a Borrower for the use of the Lender’s money. It is usually expressed as a percentage of the amount borrowed and is calculated at a specified interval over the course of the term of the Loan Agreement. The interest rate is the annual interest rate.

Advantages
• A loan agreement sets out the terms and conditions upon which a bank will lend money to a borrower.
• Because it is an agreement, it can be negotiated and agreed by the two parties.
• A loan agreement protects both parties and is a legally enforceable agreement.

Disadvantages
• A major disadvantage to a loan is that the bank (or other lender) requires that the borrower pay back the loan whether or not your business is successful
• In practice, a bank sets its own conditions for lending, and a borrower will have to comply and agree to such terms if it needs the funds.
• Negotiating a loan agreement can be complex and time-consuming. The documentation must be thoroughly understood, and if specialist legal advice is required the process may be expensive.

Key issues in Loan Agreement

Key issues to be included in a loan agreement include:
• the amount of the loan
• when funds are to be advanced
• amount of interest to be charged
• documentation to evidence advancement of funds such as a promissory note
• repayment terms and rights of prepayment if any
• how and when payments are to be made
• various promises made by the borrower
• issues surrounding when a lien will be granted to secure the funds against any assets
• events that would be considered default under the loan
• remedies available to the lender in the event the borrower default or fails to repay the loan
• provisions dealing with any other issues of concern to the lender or borrow
• general legal terms

Personal Loan Agreement
A Personal Loan is what you borrow from a bank, or a building society or institution, or from any other lender as a lump sum of money. It would ideally be the best option if you are looking to consolidate all of your debts into one, so that you could reduce overall the amount of monthly repayments on the same.

There are basically Two Types of Personal Loans. They are:

A Secured Loan
Wherein the loan involves the attachment of collateral – say, your property or any fixed/movable asset- against the sum of money borrowed. You risk losing your home should you default on repayments.

An Unsecured Loan
Here the loan is not secured against the loan amount borrowed. But consequently the lender would be charging a higher rate of interest, taking into account the high risk involved in lending the sum. Here, failure to make regular payments would see the lender fall back on the credit agreement, and resort to legal claims to make good the loss incurred.

Difference between Commercial and Personal
In many cases, regulations regarding the structure of a loan agreement focus on loans provided by banks, finance companies or any loans made from one business entity to another. With personal loans between two individuals, the requirements may not be as extensive. This means that a simple loan agreement between two private citizens may or may not be as long or as detailed as agreements drafted by commercial lenders

Payment Options
There are four options for the method of repayment.
1. Specific periodic amounts – the Borrower will make a certain payment to the Lender on regular intervals.
2. Lump sum payment at the end of the term – the Borrower pays nothing to the Lender until the end of the note term, at which time the Borrower repays the entire note in one payment.
3. Interest only – the Borrower makes regular payments to the Lender that are put toward paying off the interest on the principal amount only, with no portion of the payment going towards the principal amount itself.
4. Interest and principal – the Borrower makes regular payments to the Lender that are put toward paying off both the principal amount and the interest as it is compounded. At the end of the term of the Loan Agreement, there will be no outstanding balance to be repaid.

Witnesses and Sign
Generally speaking, there is no requirement for a witness or notary public to witness the signing of the Loan Agreement. However, depending on the nature of the loan and the governing law of the jurisdiction in which you’re entering into the loan, you may be required to have witnesses or a notary public witness the Loan Agreement. Even if it is not required, having an objective third party witness the signing of the loan agreement will be better evidence when you need to enforce the repayment of the loan. Signing the note in front of a notary public is the best evidence that the Borrower signed the loan agreement.

Loan Agreement Templates
A loan can be made without entering into a formal loan agreement but this is never wise. Using a loan agreement means that there is a legally binding contract that records the terms of the loan. If a dispute were to arise regarding the loan then you can rely on the terms recorded in the loan agreement to enforce your rights in accordance with the terms of the loan agreement
Our loan agreement template can be used by either an individual or a business, such as a company or partnership, so that you can use the document template for creating a personal loan agreement or a commercial loan agreement. The loan agreement is flexible and can be customised to suit the specific terms of the loan. For example interest is included as chargeable within our loan agreement template but can be removed to exclude interest if required.
Our template loan agreement has been drafted by a specialist commercial contracts Solicitor and Barristers so you can have the peace of mind of knowing that you are putting in place a robust and legally binding agreement that has been professionally drafted.


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