With increasing living costs each month, it is not possible to survive without obtaining a loan. Of course, there are exceptions i.e. people who managed to do well without taking a loan for their entire life but most people do take loans for buying a home, a car, or to manage educational expenses or medical emergencies.

It is, therefore, important to know everything about loan agreements before you sign one.

What is a Loan Agreement?

A Loan Agreement is a contract between two parties regarding the terms of a loan secured by one of the parties from the other. Such loan agreement stipulates terms like collateral details (if any), interest on such loan, deadline of repayment of the loan, and consequences in case of a breach of a provision of such agreement or failure to repay the loan.

Importance of a Loan Agreement

Obtaining a loan is a tedious task, especially when there is no formal agreement in place. Lack of a formal agreement while obtaining a loan often shakes the trust and confidence that the lender places in the borrower.

Moreover, a loan agreement also ensures the security of collateral on repayment of loan and prevents the lender from charging excessive interest on such loan.

Legal terms to consider

Every loan agreement should consist of the following terms to make the loan process a hassle-free experience for both parties:

i) Choice of Law

This clause should be added to a Loan Agreement when both parties reside in different jurisdictions. In such cases, it is important to decide which law should be applicable to the terms of such loan and disputes that might arise in connection with such loan.

ii) Details of the parties

The agreement should contain details of both parties i.e. the lender and the borrower, including their name, father’s name, place of residence, and contact information.

iii) Details of the collateral

The agreement should also provide details of the collateral provided by the borrower to obtain a loan including its value, how it is to be returned to the borrower when the loan amount is repaid in its entirety, and how the lender can use it to recover the loan amount which the borrower fails to repay.

iv) Interest rate and mode of its calculation

A loan agreement should stipulate the interest rate of such loan, the exact amount of interest that the borrower shall pay to the lender, and the mode of calculation of such interest amount.

v) Failure of repayment/Breach of Agreement

In case the borrower fails to repay the loan amount or either of the parties breaches a term of the agreement, such consequences should be stipulated by the loan agreement itself including using the sale proceeds of the collateral to recover the unpaid amount, filing a suit for recovery of money before the DRT, and so on.

Conclusion

One should understand the nature of a loan agreement before signing one and understand its consequences. A loan agreement binds both the lender and the borrower to the terms of the loan as contained in it. A loan agreement should contain terms regarding the choice of law, details of parties, collateral, and interest, along with the consequences in case of failure to repay the loan amount or breach of a term of such agreement.