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What is a Simple Loan Agreement?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 08 September 2016
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A simple loan agreement is a general kind of legal document that establishes formal parameters for a loan arrangement between a lender and a borrower. In general, the simple loan agreement can apply to many different types of informal or straightforward lending, in contrast to the elaborate, complex documents often drawn up by large corporate lenders. Simple loan agreements can decrease legal and administrative costs, leave borrowers more educated about what they have signed, and assist in avoiding some specific problems and conflicts over the term of the loan.

Some of what defines a simple loan agreement is related to what it usually does not include. Unlike some complex loan agreements, a simple loan agreement will not usually include variable or adjustable interest rates. Loans with variable or adjustable interest rates can leave borrowers confused by fluctuations in monthly payments. Variable interest rates can mean that a loan moves along at a low monthly payment only to “explode” debt in what is sometimes called a “balloon payment.” A simple loan agreement can avoid all of this with a simple fixed rate of interest.

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Another thing that simple loan agreements generally will not include is elaborate penalties for non-conforming payments. Some complex loans include prepayment penalties, interest penalties for early payments, or other small details usually designed to benefit the lender financially. In a simple loan agreement, there is generally more versatility for monthly payments that apply to the interest as well as the principal of a loan.

A simple lending agreement may also be amortized differently than a conventional loan or mortgage. While loan amortization makes it easy to establish monthly payments, this type of loan tracking can actually make it harder to see how payments apply to interest and principal. Simple loan agreements will often take the path of least resistance in dealing with payment records, making the entire situation as clear as possible to both the borrower and the lender.

In many countries, where unscrupulous lending companies are creating deceptive deals by making loan agreements complex and legally opaque, a simple loan agreement is very much in demand, not only for borrowers, but for consumer advocates and government regulatory agencies. Different nations deal with lending regulations in a variety of ways. Some regulating agencies will set their sights on promoting a simple loan agreement as a way to effectively regulate lenders.

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