Purpose of a Loan Agreement
Loan Agreement
A loan agreement is a document setting forth the details of a consumer or business loan. 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 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.
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.
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.
Advantages of Loan Agreement
• 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.
• Taking out a personal loan from a bank or adding debt to your credit card can be expensive. Family members or friends often just want to help out and hopefully get their money back and not earn interest.
• Sometimes loans may not be available from corporate lenders because of low credit ratings or lack of security. Family and friends may be willing to help based on their knowledge and trust.
Disadvantages of Loan Agreement
• 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.
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