What is the Need for a Loan Agreement?
A loan agreement is a written document between two parties where they agree to lend money to each other. A Loan Agreement may state what amount of money is being lent, how much interest the lender will charge, the length of time the borrower will have to pay back the loan, any penalties if the debt is not paid off, and many other terms. These agreements are often called “loan contracts”.
A loan agreement is usually between individuals, companies, or governments. It may involve any kind of asset including real estate, stocks, bonds, commodities, etc. The lender provides the funds while the borrower agrees to repay them along with interest at some point in the future.
Top Reasons Why a Loan Agreement is Important
In the domain of business, a loan agreement is a contract between a business owner who wants to start his own business and a Bank or any financial institution that lends him money to fund the operation. It is essential to get loan agreement templates from the internet, and customize the same for your own requirement.
Following are some reasons why a loan agreement is important:
- Protect the lender’s interests
- Ensure the repayment of the loan
- Protect the lender from fraud
- Provide documentation of the loan
- Provide proof of ownership
- Allow the lender to take legal action against the borrower
- Establishing the terms of repayment
- Define the rights and responsibilities of the parties
- Allocate risk and reward
- Reduce the possibility of default
- Ensure the borrower has access to funds
What do Loan Agreements Include?
There are two types of loan agreement templates: Secured and Unsecured. Secured loans are backed by assets owned by the borrower. Unsecured loans are not backed by any collateral.
All loan agreements have three basic parts: 1) the amount borrowed; 2) the rate of interest charged; and 3) the repayment schedule. Know about the same:
The first part of the loan agreement is the amount borrowed. The lender determines how much he or she wants to lend to the borrower. If the loan is for $10,000, then the lender would write “$10,000” in the amount field.
Rate of Interest Charged
The second part of the loan agreement deals with interest rates. The lender sets the interest rate based on his or her expectations about the borrower’s ability to repay the loan. If the lender expects the borrower to default on the loan, then the lender might charge higher interest rates than normal circumstances when the borrower will repay the loan. This is personal loan rates 2022 comparison from different companies here.
The third part of the loan agreement concerns the repayment schedule. Repayments are due on specific dates throughout the year. The payment schedule helps the lender determine whether or not the borrower will be able to repay the loan.
If a borrower fails to meet the repayment terms set forth in the agreement, then the lender can take action to collect the debt. There are three ways a lender can collect the debt: sue the borrower, foreclose on the property, or repossess the property.