When a loan is taken, there are various documents that need to be signed by both parties, respectively the borrower and the lender. The contract or the loan agreement is the document that formalizes the loaning procedure, making the parties legally responsible one in front of another. This means that when one of the parties that signed the contract/loan agreement is not meeting the agreed terms, the other party can initiate a legal action against it. In this situation, the loan agreement will be the base of the legal decision.
A loan agreement can vary in terms of rules and conditions, depending on the value of the loan, if there are collaterals involved or co-signers. In general for a simple loan, as for example a personal loan, the borrowed amounts purposes are not disclosed to the lender. Therefore the loan agreement will contain only general details related to the borrowed amount, applicable interest rate, repayment period and penalty fees.
In general the lenders providing simple loans, as for example the payday or cash advance loans, are using specially agreements that are drafted by their lawyers. It can be difficult for the applicant to modify the terms and conditions of these loans, as these agreements are pre-drafted.
There are some base elements that have to be included in a simple loan agreement. Here are the most important ones that should be part of the loaning contract:
- details about the two parties signing the loan (borrower and the lender), respectively their names, contact addresses, etc;
- the amount that is borrowed through this loan, the mode the amount is provided, and account details;
- the applicable interest rate, the interest amounts to be paid, and the total loan amount to be paid back by the borrower;
- terms and dates of payments, as well as details about the dates when the contract enters into force, and when the final payment has to be made;
- another important aspect is the collateral, if applicable, and in case the borrower cannot repay the loan, it has to be mentioned how the confiscation will be performed, and in what terms;
- clauses related to loan modification can also be included in the simple loan agreement.
In general a simple loan agreement must contain the following sections:
*Date of the contract
*Place and address
Details about where the contract was signed are important, as in the case of a legal action, the enforcement laws applicable locally will be followed. Relevant laws will be applicable not only on the duration of the contract, but also before and after the loan contract terms.
*Parties signing the simple loan agreement
The loan agreement has to be signed by both parties and by their legal representatives. Information related to borrower and lender’s name and address have to be included in the loan agreement, in order to be used for any communication related to the contract. Third parties or other external parties are having no empowerment to hold any of the contracting parties liable for any rights or legal liabilities that can be generated during the formation, execution, breach or relief of the contract.
Both parties have to give their free consent, according with the applicable laws, for borrowing and respectively lending the specific amount, according with the procedure stated in the agreement. The borrower has the obligation to return the same amounts that were obtained from the lender, plus the interest amounts and other fees, if applicable.
*The lending procedure
In this section have to be provided details about the borrowed amount, the borrower’s bank account where amounts have to be deposited, and the specific date when the operation has to be performed.
This part of the loan agreement will contain maximum dates from a month, up to which the monthly installment will have to be paid, and the minimum amount to be paid each month. There are various options available for the method of repayment. The fist one is choosing specific periods for paying amounts, generally established on regular intervals. A second option is to pay a lump sum at the end of the contract’s term, procedure that is usually applicable on payday loans. Another option is to pay only the interest, with no portions from the main principal amount. The fourth and the most common option, is to make regular payments containing part of the principal and interest charges. At the end of the loan contract, no outstanding balance will remain to be paid. In case the monthly installments are not paid before the due dates, details about the applicable penalties have be provided.
The involved parties have to agree the repayment period of the loan, that is in general presented in months. In general the monthly installments can be paid by the borrower using a bank check or the direct transfer option. In case the direct transfer is selected, in the agreement it should be mentioned the bank account of the lender, where the amounts will be transferred.
In the situation when the borrower fails to repay the loan as mentioned in the agreed terms, if at the end of the contract there is still an unpaid debt, the lender can have a lien on the lender’s bank account (the number has to be mentioned). The collateral does not need to be in an equivalent value with the loan’s amount. In general lenders are establishing exactly the minimum value of the collateral, that will be correlated with the total borrowed amounts.
Loan agreement and contract enforcement will be governed by the laws applicable on the territory where the parties have signed the contract.
In order to become official, the simple loan agreement must have the signatures of the borrower, lender and witnesses, if the case. For future references, details about the bank accounts mentioned should be attached to the loan agreement.