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What is a Loan Agreement?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 September 2016
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    Conjecture Corporation
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Loan agreements are binding contracts between a lender and a debtor that specify the terms and conditions that govern the extension and repayment of the loan. Most jurisdictions have specific laws and regulations that commercial lenders must comply with in order to offer loans to individuals, businesses, and other organizations. The main purpose of a loan agreement is to clearly define what both parties are agreeing to in terms of establishing the working relationship and what responsibilities each party covenants to perform for the duration of the loan.

In many countries, the establishment of a loan agreement must meet standards set by national and local laws. This arrangement is usually to the advantage of both the lender and the debtor. Compliance with the regulations makes it possible to seek legal redress in the event that one party fails to honor his or her commitment. While this is often interpreted to mean protection for the lender in default situations, the terms of a standard loan agreement also provide the debtor with legal rights and protections should the lender fail to uphold the terms governing the loan.

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There are a number of issues that are addressed and defined even in the simplest of loan agreements. In addition to the amount that is loaned to the debtor, full contact information for both the lender and the debtor is included. Any fees as well as the applicable rate of interest is also specified, making it possible to determine the final cost associated from the loan. The repayment terms are also defined, as well as how the interest rate is applied. Agreements usually identify any penalties that may be involved with paying the loan off ahead of schedule. Finally, the rights and responsibilities of each party in the event of default or the failure of the lender to provide all the services are spelled out in the text of the loan agreement.

Along with these basic provisions in the loan agreement, there may be other provisions required by national and local laws. If the agreement of loan applies to a syndicate loan, the agreement will include details relevant to the security and facility agents as well as the voting privileges extended to the lenders. Other types of loan agreements may include details on securitization and the related procedures and provisions, as well as language provisions, waivers, and any other element required by current regulations.

In many cases, regulations regarding the structure of a loan agreement focus on loans provided by banks, finance companies or any loans made from one business entity to another. With personal loans between two individuals, the requirements may not be as extensive. This means that a simple loan agreement between two private citizens may or may not be as long or as detailed as agreements drafted by commercial lenders.

Still, it is often a good idea to follow regulations governing commercial loans when entering into a private or personal loan agreement. By doing so, the rights and the responsibilities of both debtor and lender are defined in a manner that makes it easier to pursue redress in the event one party fails to live up to his or her obligations. There are templates available for use in drafting a personal or private loan agreement that can provide the basis for the text and help individuals to make sure all relevant issues are addressed and understood by both parties.

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