44+ Sample Repayment Agreements

What Is a Repayment Agreement?

When an individual applies for a loan, it is only normal for a lender to expect repayment. Interest rates are what gives life to a loan, and this is where a lender profits. The schedules for repayment will depend on the lender who supplies money to a borrower. Still, before a lender lends, he/she gets into an agreement with the borrower—a repayment agreement. A repayment agreement is an agreement between a lender or lending company and a borrower, and it sets out the provisions and laws that protect the loan. Note that keeping loan documents is very important because they serve as security for the money being handed over to a borrower.

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Loans that People Usually Apply for

Loans can be used for different purposes. People usually use it for personal reasons or for business plans. The lender doesn’t care much about where borrowers use the money they have. What matters most for them is the ability of borrowers to repay their debts. According to Jennifer Ruden, commercial banks in the U.S. granted loans amounting to $13.9 trillion in February 2020. Loans come in different types, and the following are loans that people usually apply for:

Personal Loan. A woman who wants to buy a new couch for her home can apply for a personal loan. That is, if she doesn’t have enough funds. Personal loans are usually available in banks, whether it be online or in town. The maximum amount of loan may depend on a person’s debt-to-income ratio. A DTI ratio calculates and compares a person’s monthly income and monthly debt. Usually, lenders want a DTI that is lesser than 36%. Furthermore, an individual with a good credit score may be a candidate for a lower annual interest for the personal loan he/she applies for. According to the Federal Reserve, the mean interest rate in the last months of 2019 was 10.21%, yet it may still be subject to change.Credit Card Loan. When an individual pays through a credit card, he/she is borrowing money from a bank. Though it is somewhat similar to a personal loan, a credit card is different from a personal loan because it characterizes a revolving debt. Revolving debt is the balance you currently have on a revolving credit. A revolving credit, in simple terms, is also known as your credit limit. Every credit card has a credit limit, and a consumer can continually use it until the limit is reached. Moreover, he/she has to pay it on time.Cash Advance. A person who needs cash immediately because of an emergency can apply for a cash advance through a credit card. A cash advance is an expensive type of loan that requires a borrower to pay more interest than usual, which is 15% higher than the APR. This money can be obtained over the counter or through an ATM, depending on the lending company. Not only does it require a higher interest, but it may also ask for other fees (e.g., the usage fee for accessing money through an ATM). Though a cash advance poses a high interest, it is still very accessible.Home Equity Loan. A home, depending on the season, can have a high or low market value. Home equity is the present market value of a home minus the balances a property owner owes. In other words, it is a portion of the property a homeowner has already paid, and it is an asset a homeowner can use as collateral to apply for a home equity loan.For example, a buyer purchases a property for $150,000, and he/she gives a 10% down payment, with the remaining balance under the care of a mortgage. In that case, the property owner has a home equity of $15,000. If the value of the home maintains after a year, and the payment for a mortgage is $5,000, then the owner has a home equity of $20,000. If the value of the property in the market increases in time, and the payment for a mortgage remains the same, then the home equity will also increase. In simple terms, a home equity loan is like a second mortgage you can use to renovate or do whatever you desire for your home.Business Loan. Both old and new businesses can benefit from small business loans through the Small Business Administration or through banks. The SBA is an independent government agency in the U.S. that lends a helping hand to starting and growing businesses. This type of loan will only be granted if a businessman has an official business plan. Moreover, the condition for the loan may require a collateral, which can be a borrower’s personal assets.

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How to Draft a Secure Repayment Agreement

A person can repay loan agreements in two ways—fixed or on-demand. Fixed repayments apply to purchases that require a large sum of money. The payment schedule is set on a specific time and begins the moment a borrower signs an agreement. On the other hand, payments on demand happen when a person borrows from someone they know. It is different from a fixed payment since it doesn’t set a specific time for payment since that comes on demand. A repayment agreement should specify the conditions for payment and the obligations of the parties involved towards each other. Here are the steps in making a sample repayment agreement:

One should clearly define all legal terms written in the agreement. This can include terms concerning the payment plan, interest rate, collateral, etc. According to debt.org, there are also important terms that the parties involved should understand before signing a repayment agreement. This includes the terms—involved parties, choice of law, severability provision, and entire agreement provision. For example, the severability provision is a statement that expresses the independence of every condition written in the contract.

Step 2: Determine the Interest Rate

Bear in mind that interest rates rest on the loan type you are applying for. There are cases where a lender will stipulate collateral, but this demand should not go beyond the value of your loan. In fact, there are state and federal laws that protect a borrower from tying a high-value asset to a low-value loan. Additionally, an interest rate can be floating or fixed. A fixed-rate remains constant all throughout your repayment period while a floating rate changes over time.

Step 3: Include Terms for Pre-Payment and Breach

Lenders have the right to impose prepayment penalties to a borrower who pre-closes an agreement. For example, if a borrower pays ahead a 10-year loan in five years, the lender wouldn’t get any profit from the interest rates he/she expects to receive within the 10 years. In terms of contract default, a borrower who delays on repaying his debts will automatically be considered as a violator of the contract. The violated lender can take action and bring the issue to court to hold the borrower liable for any damages caused. Moreover, this will affect the credit score of the borrower.

Step 4: Assert Laws for Protection

The 1968 Consumer Credit Protection Act seeks to protect borrowers from usury and abuse. Specifically the Home Owners Protection Act, Real Estate Settlement Act, and the Truth in Lending Act are federal laws that prevent lenders from being unfair to borrowers. For example, the Truth in Lending Act is a law that requires the lenders to disclose information to a borrower before increasing any credit. Therefore, including these laws in the contract is essential.

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FAQs

How do you compute the cost for a loan payment?

Loan computations vary and depend on the loan type. To easily compute for loan payments, you can download special calculators which are available online for your convenience. You can use a credit card calculator, interest calculator, or amortization calculator. By simply using one, you will be able to determine the amount you need to pay for your loan.

Is it okay to close a personal loan earlier than the deadline?

Repaying your loan earlier than the set timeline is okay, but some lenders may demand a fee for pre-closing the agreement. Nevertheless, this will also free you from the burdens of your debt. It is wise to take a look at the penalty provision in your contract and do a computation. If the result of your calculation benefits you, then it is wise to pre-close your loan.

What happens if you don’t pay your loan?

If you’re worried about getting into jail, don’t be, since the debtors’ prisons have been eliminated by the law years ago. Instead of getting into prison, you will be charged with more interest and fees on your credit account. Once that happens, it may be very hard for you to recover. Even if that is true, there are still many ways you can address the issue by borrowing again.

What do you mean by “Debtor’s Prisons?”

Before and during the mid-1800s, lenders imprisoned poor people who couldn’t pay their debts in a place called debtors’ prisons. Years after that, the U.S. government terminated this concept. For that reason, a person in debt cannot be forced to go into prison unless he refuses to pay his/her taxes or offer child support.

What is an acceptable credit score?

According to Experian, a credit score that is more than 700 is good if we base it on a score range of 300-850. Moreover, a score that is greater than 800 is even better. The majority of borrowers generally have a credit score ranging from 600-750. Know that good and high credit scores will keep creditors confident of letting borrowers borrow money.

Getting into debt can indeed be scary, especially when you are not sure about your business idea yet. You know that you don’t want to gamble with what you have left. Nevertheless, for some, debt is still a manageable option. Remember our example earlier? Kevin Plank started his company by getting into debt. Just make sure you plan to repay your debts, so everything will be fine for you in the end.