Conditions considered in a Loan Contract
A loan agreement is a contract prepared to bind more than one parties for the purpose of formalizing the loan process. There are different types of loan agreements that range from detailed and complex contracts to simple contracts such as promissory notes between family members and friends. Contract lawyers advocate for these agreements and with the government regulation and supervision, the following terms are followed to the letter.
It is in the most important term, the interest clause, where the two types of interest rates, the floating fees rates and the fixed fee rates are set out. The fixed fee rate is a constant number that never change in the course of the loan period, which is different for the floating fee rates that has an interest rate margin added to a benchmark rate.
Second to the list is the default interest rate clause that increases to the interest rate in case of an event where the lender does not honor the agreement and pay amounts when due. The stated default rate should accurately detail the amount not paid without overstatement of this rate since it could take the excess as penalty, making it not enforceable by law.
The other important term of loan agreements is the loan period term, which details the agreement on the payments made before the lapse of the loan period, which are put in place to make the loan more flexible. In most cases, the prepayments are mandatory and are paid at the end of the interest period hence avoiding the payment of breakage costs.
Moving on, events of default is another major loan term which is only available for the loans that are repayable at the end of fixed term because loans that are repayable on demand can be recalled at will by the lender hence no obligation for the borrower to maintain certain covenants.
The fifth term is on the commitment of a loan agreement and divides agreements into two: Committed and uncommitted agreements. Committed agreements give the borrower certain conditions precedents (CP) before they qualify for a loan but there are no CPs for uncommitted loans.
The other key term relates to the repayment provisions of the loan and clearly states whether the loan is repaid on demand or on schedule and gives the schedules and timelines of this repayment.
Whether the loan is secured or unsecured is another term of the loan agreement with major loans being secured against assets although this is not always the case as lenders may risk not securing a facility.
In conclusion, it is necessary to consider all the terms of a loan agreement, which give the process of securing the loan, seeing that the document is protected by the law with even contract lawyers in it.