Terms of a Loan Agreement
A loan agreement is a binding paper used to formalize an agreement between the participating parties. Loan agreements come in several types, from the simplest such as promissory notes to complex contracts such as mortgages and long term loans. Each of these types of loan agreements is governed by the government and advocated by contract lawyers, who ensure that there is no oppression and that the following terms are followed as agreed.
The first and most important term is interest clause, which sets out the two types of interest rates; the fixed fee rates and the floating fees rates. The fixed fee rate is a constant number that never change in the course of the loan period, which is different for the floating fee rates that has an interest rate margin added to a benchmark rate.
Another term is stated in the default interest rate clause, which increases the interest rates in the case where a party fails to pay up some amounts when due. The law however requires the stated rate to accurately reflect the amount not paid since an overstatement would present it as a penalty, making the rate not enforceable.
Thirdly, prepayment as a term states details the contract in regard to the payments made before the end of the loan period to make the loan payment more flexible. To avoid breakage costs, prepayments, which are mostly mandatory, are paid at the end of the interest period.
The fourth term is on events of default but is only available to loans repayable at the end of a fixed term since fixed term loans can be recalled at any time hence no need for a clause to protect the lender.
The fifth term is on the commitment of a loan agreement and divides agreements into two: Committed and uncommitted agreements. Committed agreements give the borrower certain conditions precedents (CP) before they qualify for a loan but there are no CPs for uncommitted loans.
The other key term relates to the repayment provisions of the loan and clearly states whether the loan is repaid on demand or on schedule and gives the schedules and timelines of this repayment.
The seventh term of loan agreements is on the security of the loan which can either be secured against assets, which is mostly the case or unsecured, which exposes lenders to the risk of losing their money.
To conclude, it is necessary to follow the terms that define how the process of loaning is carried out, seeing that the document is under the protection of the law.