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What is a Lending Agreement?

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  • Written By: Ken Black
  • Edited By: Andrew Jones
  • Last Modified Date: 09 November 2016
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A lending agreement is a legally-binding contract between the borrower, or customer, and the lender, generally a financial institution such as a bank. The main purpose of the lending agreement is to set forth terms and conditions that will be enforceable throughout the life of the loan. The agreement outlines all the important provisions in the loan, including the amount, interest rate, payoff date and penalties for not adhering to the loan terms.

From a borrower's perspective, the most important parts of a lending agreement are typically the amount of the money borrowed and the interest rate. These two things generally lead to a certain payment amount that must be paid on a regular basis, generally monthly. The rate is determined by calculating the amount of the loan, interest rate and length. Often, the agreement will spell out specifically how much money is due per payment.

In order for a lending agreement to be valid, it must meet the legal requirements of any other contract. Generally, the borrower signing the agreement must be 18 years of age or older, and be of sound mind. In some countries, the age in which an individual is able to enter a contractual obligation may be different. An agent for the lender must also sign, and the document may be need to be notarized or validated in some other way.

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If the borrower violates the terms of the lending agreement, the remedies may be a combination of things in the lending agreement, as well as legal remedies allowed by law. One of the last resorts to remedy a violation is foreclosure or repossession. In this case, the property used to secure a loan is collected by the lender. If the loan is unsecured, penalties may include fines, but property may be harder though not always impossible to acquire.

A lending agreement also typically spells out any other obligations that a borrower and lender must meet. For example, the borrower may be required to carry insurance on a car or home. If that insurance lapses, the lender may be able to confiscate the property, or buy a policy and add the cost to the loan payment.

Often, if a borrower is having trouble making payments, a lending agreement is used as a framework by which to negotiate a deal between the parties. While the lender may be within a legal right to fully enforce the agreement, the ultimate goal of the lender is usually to get a borrower to cooperate. In order to obtain that cooperation, the agreement may be modified with the consent of both parties. This allows both sides a chance to rectify the problem before more drastic measures are taken, which can benefit all involved.

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