Once you have been approved for a loan, you need to sign the agreement to finalize the deal. You shouldn’t rush to take a pen into your hands. You should first read through the policies. Make sure you are fine with every single statement. If not, you need to discuss it with the lender before it’s too late.

Get some guidance. Check the things you should know about loan agreements.

A Loan Agreement Explained

A loan agreement is considered to be a legally bound contract signed between the lender and the borrower. It aims to regularize the obligations of both parties. These include the loan size, interest rate, repayment period, penalties, etc. The document may be different for each particular type of lending service and the amount of money requested.

Types of Loan Agreements

Secured

A loan product needs to be borrowed against collateral. If the borrower can’t make repayment, the collateral will be used as compensation. Lenders accept driving vehicles, real estate, and other valuable belongings to secure the given away money.

Unsecured

A loan product doesn’t require a borrower to put valuable belongings at stake. Its borrowing limit is usually lower due to the absent collateral. The charge imposed on the loan amount is also higher. If the lender defaults on a final payment, the lender has a couple of options to recover the amount. For example, credit card loans are considered to be unsecured. Personal loans can be both unsecured and secured.

Elements of Loan Agreements

The document doesn’t have a random structure. It must involve specific elements to have a legal value. Even though some differences are possible between available loan types, the major elements include:

1. The Lender And The Borrower’s Data

Getting the basic personal information is the first thing to be done. The contract should include details about both parties putting signatures on the final document. Some of them are:

• Full names
• Physical addresses
• Contact details
• Social security identification
• The loan and repayment size

2. Interest Rate

Lenders impose a pre-agreed charge on the requested amount of money. This extra charge is viewed as compensation for possible risks. You should understand one thing: the lender tries to earn money from every deal. Adding an interest rate is part of it.

 3. Contract Duration

The contract coverage usually depends on a specific scheme. This scheme estimates the borrower’s monthly amount by splitting the entire loan amount by the number of payments needed to pay off the full amount. Interest is charged on each monthly payable amount. It is highly recommended to keep the loan duration as short as possible. The higher the loan duration, the higher charge you have to cover against the loan amount.

 4. Agreement Format

The payment method reflects how the borrower wants to complete repayment. Here are a few possible ways to do it:

• Standard payments over a fixed period;
• Regular payments, especially to cover the interest rate;
• Recurring payments to cover the main sum and the interest.

5. Repayment Scheme

The possible ways to pay off the loan include:

• Installment payments happen to be the most popular repayment method. You’ll need to complete routine payments until the interest and the main sum are fully covered.
• Payment on demand happens when your lender decides to make repayment after giving you advance notice based on the initial agreement.
• Payment by the end of the deadline is a contract that contains the final date when all the interest and principal are covered in one sum.

6. Missed Or Delayed Payments

The contract is made up based on the law. Your late payment might lead to a late fee from your lender. After one month, if you are still stuck with the payment, you can see your credit score decrease. Immediately, you will see the consequence in your credit report. If you wait too long with repayments, you will see the situation with your credit score getting worse and worse.

You can avoid more severe consequences by discussing options and solutions with the lender. The company might allow you to prolong the repayment deadline by another 30 days.

The Right Place to Use a Loan Agreement

The contract is required each time you borrow money filld from a private lender. It puts a loan process into the legal field. So both parties know their obligations and responsibilities in front of each other. Here are some of the lending products that most commonly require a loan agreement:

• Student loans;
• Real estate loans (e.g. mortgages);
• Private or personal loans;
• Large purchases (e.g. vehicles or furniture);
• Commercial or business loans (e.g. capital to startup loans).

Bottom Line

Whether it comes to the loan between family members, friends, or companies, you must reach an effective agreement to minimize any chances of conflict in future prospects. Look through the policies carefully before concluding a loan agreement. This works both for the borrower and the lender.