43+ Sample Loan Agreements
What Is a Loan Agreement?
As a borrower, you need to know the interest you have to pay by demanding a written contract from your lender. In this way, you will be saved from paying more than what is expected of you. Basically, a contract that binds two people in the lending business is called a loan agreement. It is an agreement that is mainly based on the “terms and conditions” that the lender has set. For that reason, the borrower has to agree to whatever is written in the contract for him/her to get the loan.
In addition, a loan agreement is an important document that state agencies require so the parties involved will know what their obligations are under the law. Whatever type of loan it may be, it can be helpful when disputes in the future are brought to court. Compared to a promissory note, a loan agreement is more detailed and comprehensive in its scope.
What are the Most Common Categories under Loan Agreements?
In simple words, a loan for a real estate property is termed as mortgage. An individual who wants to buy a home or a property that he can’t fully pay at the moment can loan from a private lender—but with a collateral. For the security of the lender, a collateral is necessary. A collateral is a repayment that is of high marketing value in case the borrower couldn’t pay his/her debt in the process.
Normally, mortgages are being paid on a monthly basis and it comprises the principal amount and the interest. This includes insurance and taxes as well. There are actually two types of mortgage loans: purchase loan and refinance loan. The most common type is the purchase loan, this is the money you get from a lender so you could buy a home. On the other hand, the refinance loan is an existing mortgage that you want to transfer to a different loan.
According to Jennifer Rudden, during the later months of 2019 the total amount of purchase loans reached up to 375 billion dollars in the U.S. while refinance loans were only 230 billion in total.
Personal loans are money borrowed usually from banks. The borrower typically loans a considerable amount of money for his/her own purposes. He/she could loan for a wedding, house renovation, vacation, and more. Same with mortgage, a collateral that is of the same value as the money being lent should be secured to cover for situations where loans are not being repaid.
Nevertheless, there are others who choose and go for unsecured loans. Unsecured loans do not require collateral but rely on a borrower’s credit record. The catch is, since this type of loan is more risky, it comes with more interest. Furthermore, personal loans have a 12 months to 36 months deadline depending on the agreement. The longer the payment period is, the more interest is being paid. The same is true vice versa.
It is a reality that newly bought cars in the U.S. are mostly paid off through loans. The Federal Reserve Bank reported that about 107 million people in the U.S. loaned cars in the year 2017. To simplify things, a car loan is primarily and simply under the category of personal loans and to successfully loan a car the following should be considered:
Know Your Budget. List all your monthly payments and see if how much money you could afford to pour out on a car loan. Also, decide on how much you could pay for an initial down payment.
Keep a Good Credit Record. Lenders do regard your credit score when setting rates for loans.
Look for the Best Deal. Not all lenders offer the same rates. So, it’s better to go around and search for the best deal you could get before you purchase the car that is on your list.
According to the America’s Debt Help Organization, the money students have to pay for higher education is continually on the rise since 1980, and in 2017 it increased at about 241%. A student loan helps individuals who need assistance financially when it comes to fees for colleges or universities. These fees include living costs, school supplies, and tuition fees. Mostly, college students are offered this type of loan at a lesser interest.
Loans from the federal government are usually better than loans from other private institutions because the interest is lower. The advantage of this loan is that students are not pressured to pay their debts unless they have graduated. Here are three different types of loans offered by the federal government of the U.S.:
PLUS loan. This loan is primarily a proposal to parents. It is similar to loaning from a bank.
Perkins. Mainly supported by the federal government, the lender of this loan is the school itself.
Stafford. Open to all students, this type of loan is strictly under government regulations and is dependent upon the student’s current financial status.
It is an observed reality that new businesses survive by applying for business loans. They do this to pay for their business expenses and for their business to thrive in its first few years. Compared to personal loans, business loans pose a higher risk for lenders, therefore they have more specifications and requirements. As stated by business.org, there are six requirements for business loans:
Credit Record:As mentioned earlier, it is normal for lenders to check the borrower’s credit score. A good credit record is a necessary requirement.Business Age: Most often, businesses that are less than two years old have a hard time getting approved for loaning.Debt Amount: New loans are not for businessmen who have piling debts.Collateral: Again, collaterals secure the lenders in case borrowers are not able to pay their debts fully.Business Type: Lenders evaluate the risk your business type involves and not all industries get the same favor.
In cases of emergency, a cash advance may help when paying through a credit card is not applicable or if you have difficulty using your paycheck. You can make use of this type of loan commonly in banks or at ATMs. To get a cash advance, the only requirement you need is your credit card. Note that having a credit card means that you are under a loan agreement. If the debt is not paid on the time specified, the bank will charge fees at higher rates.
How to Make a Comprehensive Outline of a Loan Agreement
Every loan agreement is different in its own way because not all situations are the same. Having a temporary template of a loan agreement that you can change will be helpful. You can only then make it permanent when you and your borrower have agreed on the terms written in the contract. With that said, here is an example outline of a loan agreement and its sections:
1. Initial Section
This part of the loan agreement includes the date of effectivity, the identification of both parties, and the loan amount. The exact day you signed the contract is the date of the contract’s effectivity, and this means that you have received the money you’ve loaned for from the lender. Additionally, the relationship of both parties should be included in the earlier parts of the contract along with some personal information. Lastly, the exact loan amount should also be stated.
2. Middle Section
The middle section of the agreement includes information regarding the Collateral, promissory note, and the Terms and Conditions.
Collateral. The collateral can be a property, a car, or equipment depending on where the loan is used for. This is an asset that protects the lender in case the contract is not fulfilled.
Promissory Note. This may be part of the loan agreement. It is a promise written by the borrower to pay the lender the exact amount of money he/she owes at a time agreed by both parties. Normally, this note specifies the original amount, the interest, the deadline, and the signature of the issuer.
Terms and Conditions. The following are what includes a typical contract:
- Loan amount
- The interest which is known as the APR/annual percentage rate. The rate can be fixed or changed.
- Schedule for payment
- Penalties in conditions where the payments are delayed even with a grace period provided.
- An “acceleration clause” is a provision in the agreement where the lender is authorized to force the borrower to pay all his debts when the requirements in the contract are not attained.
3. Final Section
The last part of the agreement includes the details concerning the borrower’s representation and the law that governs.
The Borrower’s Representation. The borrower is required to pledge that the statements written in the contract are correct. One example statement is the legality of the business to lend in your state.
The Law that Governs. Depending on which state you currently belong, it is very essential that your contract is governed by the laws of the state to make it enforceable.
The advantage of using loan agreements is the availability of these contracts in its different forms. Though there are several types of loan agreements, they are all essentially the same in purpose. As a lender, the safety of the money you’ve lent to someone you trust or even to a stranger lies on the agreement or contract you have carefully outlined for them.
As a borrower, you need the agreement as much as the lender does because it is also for your security. You have to know the details regarding the collateral, interest rate, terms, laws, and more. These details will guide you through the loaning process until the contract is over. As you can see, both lenders and borrowers benefit from this agreement. Therefore, on whichever side you may be, be practical—gain more or save more money with the use of a loan agreement.