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A loan agreement is a legal contract outlining the terms for borrowing and repaying money between the lender and the borrower. It is a legally enforceable contract. These agreements come in a variety of forms, from simple promissory notes between friends and relatives to more intricate papers like mortgages. Let's find out more below about a loan agreement's key components.
A loan agreement, sometimes used interchangeably with terms like note payable, term loan, IOU, or promissory note, is a binding contract between a borrower and a lender that formalizes the loan process and details the terms and schedule associated with repayment. Depending on the purpose of the loan and the amount of money being borrowed, loan agreements can range from relatively simple letters that provide basic details about how long a borrower has to repay the loan and what interest will be charged, to more elaborate documents, such as mortgage agreements.
Regardless of the type of loan agreement, these documents are governed by federal and state guidelines to ensure that the agreed-upon interest rates are both reasonable and legal.
Loan agreements are beneficial for borrowers and lenders for many reasons. Namely, this legally binding agreement protects both of their interests if one party fails to honor the agreement. Aside from that, a loan agreement helps a lender because it:
Borrowers benefit from loan agreements because these documents provide them with a clear record of the loan details, like the interest rate, allowing them to:
Generally speaking, loan agreements are beneficial any time money is borrowed because it formalizes the process and produces results that are usually more positive for all parties involved. Though they are helpful for all lending situations, loan agreements are most commonly used for loans that are paid back over time, like:
While promissory notes have a similar function and are legally binding, they are much simpler and more closely resemble IOUs. In most cases, promissory notes are used for modest personal loans, and they usually:
Conversely, loan agreements usually:
An agreement for a company loan is merely a contract. This agreement is crucial to the success of the company financing for its entire term. The specifics and facts mentioned in such documents account for their importance. Every element of the business loan one chooses is contained in the business loan agreement. The borrower must comprehend every word in the agreement before they sign it. It could create major future disputes if they are unaware of it.
Loan agreements typically include key details about the transaction, such as the:
The loan amount refers to the amount of money that the borrower is receiving.
Interest is used by lenders to compensate for the risk of lending money to the borrower. Usually, interest is expressed as a percentage of the original loan amount, also known as the principal, that is then added to the amount loaned. This extra money charged for the transaction is set at the signing of the contract, but it can be instated or increased if a borrower misses or makes a late payment. Additionally, lenders can charge compound interest where the principal amount is charged with interest as well as any interest that has accumulated in the past. The result is an interest rate that slightly increases over time.
The life of a loan agreement is usually dependent on what is known as an amortization schedule, which determines a borrower's monthly payments. The amortization schedule works by dividing the amount of money being loaned by the number of payments that would need to be made for the loan to be paid back in full. After that, interest is added to each monthly payment. Though each monthly payment is the same, a majority of the payments made early in the schedule go toward interest, while most of the payment goes toward the principal later in the schedule.
Unless there are early repayment penalties associated with the loan, it's typically in a borrower's best interest to pay back the loan as quickly as possible because it reduces the amount of interest owed.
The payment method details how the borrower plans to pay the lender. This can be through:
There are two types of loan repayment schedules:
Most loan agreements provide the actions that can and will be taken if the borrower fails to make the promised payments. When a borrower pays off a loan late, the loan is breached or considered in default and they could be held liable for any losses that the lender suffered because of it. Aside from the lender having the right to pursue compensation for liquidated damages and legal costs, they can:
Key details about the borrower and lender must be included in the loan agreement, such as their:
Depending on the loan and its purpose, the borrower and/or lender can either be a corporation or an individual.
Some of the key terms you should know and understand are:
It is in the best interest of both borrowers and lenders to obtain a clear and legally binding agreement regarding the details of the transaction. Regardless of whether the loan is between friends, family, or major corporations, when you take the time to develop a comprehensive loan agreement, you end up avoiding plenty of frustration in the future.
If the buyer defaults and doesn't pay back the money within the allotted time frame, the loan agreement is enforced. The lender can then use a court to enforce such agreements. To avoid future misunderstandings or legal issues, it is crucial that each party carefully review the loan agreement terms and conditions before signing.
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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
Rhea de Aenlle is a business-savvy attorney with extensive experience in Privacy & Data Security (CIPP/US, CIPP/E), GDPR, CCPA, HIPAA, FERPA, Intellectual Property, and Commercial Contracts. She has over 25 years of legal experience as an in-house counsel, AM Law 100 firm associate, and a solo practice attorney. Rhea works with start-up and midsize technology companies.
Tim advises small businesses, entrepreneurs, and start-ups on a wide range of legal matters. He has experience with company formation and restructuring, capital and equity planning, tax planning and tax controversy, contract drafting, and employment law issues. His clients range from side gig sole proprietors to companies recognized by Inc. magazine.
Tiffany received her Juris Doctorate from the J. Reuben Clark Law School, Magna Cum Laude. She is admitted to the Utah State Bar and the New Mexico State Bar. She practices in the areas of real estate, general business, business formation, employment agreements, and civil litigation.
Talin has over a decade of focused experience in business and international law. She is fiercely dedicated to her clients, thorough, detail-oriented, and gets the job done.
Stan provides legal services to small to medium-sized clients in the New England region, and throughout the U.S. and abroad. His clients are involved in a variety of business sectors, including software development, e-commerce, investment management and advising, health care, manufacturing, biotechnology, telecommunications, retailing, and consulting and other services. Stan focuses on the unique needs of each of his clients, and seeks to establish long term relationships with them by providing timely, highly professional services and practical business judgment. Each client's objectives, business and management styles are carefully considered to help him provide more focused and relevant services. Stan also acts as an outsourced general counsel for some of his clients for the general management of their legal function, including the establishment of budgets, creation of internal compliance procedures, and the oversight of litigation or other outside legal services.
Sam Widdoes has practiced law in California since 2014. He began his career as a litigation associate at a boutique firm in Los Angeles, and founded a production development company with a partner in 2017. Since then, Sam has served as the head of business and legal affairs at District 33, while working hand-in-hand with writers, directors and actors to develop, pitch and produce scripted and unscripted content. In that role, Sam produced the documentary series BLACKBALLED for Quibi/Roku, and will produce the upcoming documentary feature AS WE SPEAK directed by J.M. Harper for Paramount+/MTV, and the doc series THE BLACK BOX for MRC and XYZ Films. He is also the executive producer of an upcoming limited series with CBS TV starring Judith Light and Noah Wyle called SHADOWS IN THE VINEYARD, and a feature comedy for Spyglass Entertainment, among other projects. In early 2022, Sam opened WIDDOES LAW, APC, after recognizing a need for experienced legal services in the unscripted and documentary spaces. Since opening his own practice, Sam has advised producers, editors, directors and rights holders on a variety of agreement negotiations, including option purchase contracts, collaboration agreements and documentary producer deals. Sam also serves as production counsel for several documentary features, series and short films, and will draft, negotiate and advise on all legal aspects of the projects, including financing, production and distribution. Sam earned his Juris Doctor from The Catholic University of America, Columbus School of Law in 2013, where he graduated on the Dean's List and as a member of the Society of Trial Advocates. He holds a BA in journalism from the University of Richmond, and sits on the Board of Trustees at Turning Point School in Culver City, California. Sam is passionate about quality storytelling, and supporting those with the vision and drive to share their stories with the world.
