There may come a time when the need to loan or borrow money is inevitable. Whether you are loaning money from a lending company, an organization, or a family member, it is important for you to properly document these types of transactions. How exactly do you this? To ensure that both the borrower and the lender is protected throughout the entirety of the transaction, a loan contract sample is important. A loan refers to the act of borrowing or loaning money from a particular entity wherein the borrower will have to pay the lender for a certain period of time with an interest to the amount borrowed.
There are many reasons why people loan money, whether it is for business, personal, or when purchasing a vehicle or a real estate property. This article is useful if you want to learn more about loan contracts. Below, you will be able to read about the importance of a loan contract, the important terms that you need to have in the loan contract, including the steps in creating one. Plus! We also have some essential pointers to remember to help guide you when creating your own loan contract. You will also find various loan contract templates below that you can download should you need help in formatting your document.
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What Is a Loan Contract?
A loan contract sample is a written document that lending companies or organizations use to ensure that the money that has been loaned will be repaid by the borrower. A loan contract outlines the responsibilities of both the borrower and the lender. Without drafting a legal document when dealing with these transactions, both parties will face the risk of encountering problems in the future. In addition, a loan contract can only be considered a legal document when all the elements are present in the document, including the signature of both parties. As mentioned above, there are various types of loan contracts that can be used depending on its purpose. Here are some of the instances when a loan contract can be useful.
- When an individual purchases a property or a home, he/she applies for a loan, which is when a loan contract can be used. This type of loan contract is commonly called a mortgage contract. A mortgage contract is a document used by individuals in order to help them finance the purchase of a home or a particular property.
- When a particular company applies for a loan for a new project or to help operate the business, a business loan agreement is essential.
- Another type of loan contract is a student contract. This type of contract is used when a student applies for a loan to fund their education, especially for college or university.
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Common Loan Contract Terms and Conditions That Are Important
The terms and conditions contained in a loan contract are one of the most important aspects of every contract. The terms and conditions of a contract refer to the provisions that outline the obligations of both the lender and the borrower as well as the things that have been agreed upon by both parties. Here are some of the most common terms and conditions that should be included in every loan contract:
- The interest rate:
- The interest rate refers to the amount of interest that will be charged by the lending company to your loan balance for the duration of the transaction. The amount of interest mainly depends on the type of loan that you have, as well as the amount that you have loaned.
- Monthly payment:
- The monthly payment indicated in the loan contract depends on the duration of the loan as well as the interest rate of your loan. It is necessary for every contract to indicate the amount you will have to pay on a monthly basis including other information regarding the repayment of your loan.
- Penalties for prepayment:
- Before signing a loan contract, it is important to determine whether there are prepayment penalties. Prepayment penalties refer to the amount charged by the lending company for any early payments or extra payments. Checking if the loan you have charges for any early payments is important to ensure that you will not be wasting money.
- Secured or unsecured loan contract:
- A loan agreement contract can either be a secured or unsecured one. A secured contract, such as a home loan, is usually secured against another asset. An unsecured loan, on the other hand, can increase the risk of the lender and will also result in a higher interest rate for the buyer. Both the lender and the borrower can negotiate on these terms depending on the agreement samples.
- Bilateral or syndicated:
- Lastly, it is important to determine if a loan contract is bilateral or syndicated. A bilateral loan contract is used for more basic transactions, while a syndicated loan contract is used for lenders like an investment or corporate bank and if the amount of the loan is high.
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Creating Your Own Loan Agreement Contract
Understanding the steps to create a complete and useful loan agreement contract is important especially since loan transactions involve money. To help you create your own loan agreement contract, we have included below the steps for creating one, from preparing your document, writing it, to finalizing your contract.
The steps are as follows:
Step 1: Preparing your loan contract
Before you start writing your loan contract, it is essential that you clearly understand the purpose of the document that you will be creating. Ensure that both the lender and the borrower have thoroughly discussed the details of the loan such as the amount to be loaned, the terms and conditions, the interest rate, and the various penalties that will be charged should the borrower fail to pay on time. Gather all the needed documents like the borrower’s credit report, proof of his/her income, and work references.
Step 2: Writing your loan contract
- The first step to writing your loan contract is to write the title of the document. It is important that you indicate the type of document that you are creating.
- Next, in your loan contract, clearly write the names of both parties involved in the transaction. Write the complete name of the lender, as well as the name/s of the borrower. Also, include the address of each party.
- Specify the date when the loan contract was entered into. The date should be written in every loan contract in case any misunderstanding or dispute arise during the transaction.
- Write the total amount borrowed or loaned by the other party and include the interest rate depending on the calculation. For example, an interest rate can be computed with a rate of 6% per annum depending on what was agreed upon as well as the amount borrowed.
- Write the repayment schedule sample by specifying the date when the first payment is due followed by all the other payments until the loan has been fully repaid.
- Include the various clauses found in every loan contract, as well as other provisions. This is important to ensure that both parties fully understand their rights and responsibilities, what is expected of them, and at the same time, assure that they are protected by the loan contract. You can refer to a loan contract sample that you can download in this article and on our website should you need a reference.
Step 3. Finalize your loan contract
- Before you finalize your loan contract, include different law provisions that will help you resolve contract disputes in the future. Also, include a merger clause in your loan contract. If a contract includes a merger clause, it means that any changes or alterations made in the contract should be done in writing. This adds protection to both the lender and borrower, especially if one party claims that side agreements were made without it being present in the document.
- After the loan agreement is finalized, the signatures of both the lender and the borrower should be affixed to the document. This indicates that both parties have completely agreed with all the information written in the contract, making it a legal document.
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