Things to Look Out For: Loan Agreements

Loan Agreements essentially lay down the terms and conditions upon which one party lends money to another party. Although loan agreements are most commonly found between banks and other entities, private individuals too can have loan agreements between them. Companies may also have loan agreements with their employees. Each agreement for loan shall necessarily have few provisions which are the governing provisions of the agreement. The exact important provisions of an agreement are unique to each contract. Below are a few common provisions important for loan agreements.

Elements

1. Details of the parties
The parties to an agreement need to be identified properly in any agreement. In loan agreements, since money is to be lent and paid back, oftentimes with interest, the importance of identifying the parties becomes even more crucial. This is done by way of mentioning various details of the parties that will enable anyone to easily identify each party.

2. Principal Amount
This is the amount being lent. It is important that the mention of this amount is not only accurate to each decimal (if any), but also that the amount is identified in words as well. For example ₹50 (Rupees Fifty Only). This is done in order to ensure that the amount mentioned is exact and is easy to understand for anyone who reads the contract, and that there is no element of doubt with regards to the principal amount.

3. Interest Rate and Type
Interest rates are charged for two purposes - to combat the inflation rate and to allow for the lender to receive some compensation for the risk of lending money. It is important to ensure whether one party, as the lender, can levy interest or not as per the applicable law of the land. Interest rate is applied on the principal amount and the resulting amount is the total amount to be paid by the borrower. It is also important to ensure that the type of interest applied to the principal amount is the type of interest that the parties had agreed on.

4. Manner of Payment and Repayment
The manner in which the lender will lend the money to the borrower and the manner in which the borrower is required to pay the lender back is specified in these provisions. The manner of disbursal of loan amount may be one lump-sum payment or releasing payments in batches over a period of time. Repayment of loan is specified in the agreement in order to avoid any confusions and avoid there being a reason for the occurrence of an event of default. Repayment may also be a one-time lump-sum or payments made in instalments over a period of time. These payments may or may not include interest amount as well, as per the terms of the loan agreement.

5. Security
This is otherwise known as a mortgage. Financial institutions, when they lend money, often ask for some sort of security before lending the money to the borrower. Wherever a security has been provided as a promise and assurance of payment, such security is liable to become the property of the lender in the event of failure of the borrower to repay the loan. The property is then utilised by the lender to recover the amount of loan.

6. When is the Repayment Due?
This is also referred to as the maturity date of the loan. In simpler words, this date tells the borrower, from which date exactly he is required to start paying the lender back the loaned amount, as per the terms of the agreement, subject to the interest amount and manner of payment.

7. Default and Penalty Provisions
This provision deals with, in the event of either party defaulting on any performance as required by the agreement, what shall be the outcome of such default. Generally, these provisions list out the consequences of the late payment or non-payment of loan amount by the borrower as required by the agreement. It may include a penalty fee or even an penalty interest, to be recovered with the final payment.

Conclusion
Loans are quite common in the lives of people, whether it be house loans, vehicle loans, personal loans or even private loans. It is generally a good practice to ensure that one understands the full extent of the provisions of the loan agreement, as it essentially involves an amount that needs to be paid back, under very specific conditions and manner. The nature and circumstances of the loan agreement also tend to influence the exact provisions considered important, and hence it is highly encouraged to fully read and understand an agreement.