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What is a Credit Agreement?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 November 2016
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    Conjecture Corporation
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Credit agreements are legal documents that detail the terms and conditions of the business relationship that exists between a lender and a client. Agreements of this type are used whenever a bank extends a loan, a credit card provider authorizes the issuance of a credit card to a new customer, and even when a financial institution establishes a line of credit that the customer can draw upon when and as needed. The provisions found within a credit agreement address specifics such as the terms of repayment, and the amount and type of interest applied to the outstanding balance. A credit agreement will also provide information regarding the steps each party may take in the event that the other party fails to meet the commitments identified in the text of the document.

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There are several factors that go into determining what information is addressed in a particular credit agreement. In some cases, the type of credit extended will be key to the overall structure of the contract. For example, both the format and the issues addressed in a mortgage contract are normally quite different from the look and general terms associated with a credit card agreement. The contracts will include a few similar items, such as terms of repayment and the rate of interest that is applicable throughout the life of the document. At the same time, the credit agreement that governs the credit card will include data relating to how minimum payments are calculated, while the mortgage contract will address the amount of the monthly payment that must be made in order to keep the account current.

With both personal and commercial credit agreements, laws that are drafted and enforced by government regulatory agencies help to shape the content and the structure of different types of credit contracts. The intervention of governments into the process of extending credit helps to ensure that there is some degree of uniformity in how these financial transactions are managed. This in turn protects the consumer from entering into a financial commitment that contains provisions he or she cannot possibly fulfill. Regulatory agencies also protect lenders, by requiring that approved formats that help set standards for the consideration of credit. This helps lenders to minimize the possibility of default, since consumers who do not meet this basic criteria can easily be denied credit.

Since a credit agreement is a legally binding document, consumers should read the terms and provisions carefully before making any type of commitment to the lender. This involves looking beyond the competitive interest rate and the apparently equitable terms of repayment. Reading the document thoroughly and asking questions about anything that is not readily understood will help to avoid misunderstandings that could have a negative impact on the relationship at some later date.

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ceesay
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what are the differences between the types of credit agreements?

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