Loan Agreement

Loan agreement summary:

• A loan agreement is a legally binding contract between a borrower and lender specifying the agreement between the parties. 

• A loan agreement explains the terms and conditions of a loan, such as the interest rate and repayment schedule.

• If either party doesn't follow the agreement, the written contract establishes what legal remedies are available.

Loan Agreement Definition and Meaning

A loan agreement is a contract between a borrower and a lender. This could be a simple contract you create if you lend a friend money. Or it could be a long, complex agreement with many terms and conditions if you're taking out a mortgage or car loan from a lender. 

Loan agreements list and explain each party's obligations. These contracts should be as specific as possible about the details of the loan so that everyone, including the borrower, lender, and any third parties, understands the terms of the financing arrangement. 

Comprehensive Breakdown of Loan Agreements 

Loan agreements protect both borrowers and lenders. Loan agreements provide a written record of the loan terms and obligations between the parties. Both the borrower and lender can refer to the loan agreement to see details of the financing. If either party doesn't meet their obligation, the loan agreement also makes it easier to pursue a legal remedy. 

Loan agreements should be in writing and should be created for all loans, even loans between friends or family members. Lenders have standard loan agreements that were written by their attorneys to ensure they comply with state and federal laws. Borrowers must sign these agreements before a lender releases funds. 

Key Components of a Loan Agreement

A loan agreement should contain specific details covering all the terms of the loan arrangement. This can include:

• The amount borrowed

• Who's responsible for repaying the debt (this could include the primary or main borrower, as well as a co-borrower/joint borrower or co-signer)

• The interest rate 

• When and how interest is charged

• Whether it’s a variable interest rate that can change or a fixed rate that will stay the same for the life of the loan 

• The loan repayment term, or how long repayment will take

• When and how often the borrower must make payments: monthly, weekly, biweekly, or a lump sum

• Lender fees, including origination fees or prepayment penalty fees

• Whether the loan is unsecured or secured with something of value the borrower pledges to the lender to guarantee the loan (an asset)

• What happens if the borrower misses a payment or is late with a payment

• What happens if the borrower defaults and doesn't pay the loan back at all

• How conflicts will be resolved, such as through arbitration or mediation

Other terms and conditions may also exist, depending on the details of the agreement. 

Every term of the loan agreement should be clearly spelled out so anyone reading the contract can understand exactly the details of the agreement between the borrower and lender. That way, everyone knows what's expected, with no surprises.