A loan agreement establishes an understanding between the creditor and the debtor. The primary purpose of this crucial document is to protect the lender in case the debtor doesn’t pay back. Do you want to apply for a loan? Before you sign the dotted lines, it is crucial to understand what to look for in a loan agreement and be clear about all the terms and conditions.
In this blog, we discuss the importance of a well-defined loan agreement, what to check in it, and the loan agreement review process.
Essential Components to Check in a Loan Agreement
Here are the essential loan-related components that you should check before signing a loan agreement.
Interest Rates and Terms
Understanding the interest rate is crucial when signing a loan agreement. It helps you get an idea about the overall cost of borrowing. Opting for a loan with lower interest rate makes monthly payments more manageable. In this regard, if you have maintained a high credit score of 700+ you have better chances of securing loans at lower interest rates.
Repayment Schedule and Options
Before availing a loan, check the repayment duration to understand how much time you have to repay. Loans with a longer duration come with a smaller EMIs and vice versa. The repayment duration must in line with your repayment capacity so that you can handle the EMI payments without any hassles. At Poonawalla Fincorp, we offer a repayment tenure for 12 to 60 months, and you can choose the term to suit your needs.
Collateral and Security
This section outlines the type of assets that you can provide as security for the loan. Once the loan is fully repaid according to the agreed terms, you get the asset back. Ensure that you review and negotiate this clause before proceeding with the loan agreement.
Additional Provisions and Clauses
The loan contract must clearly outline the legal responsibilities of each party. Here are four essential legal terms mentioned in the loan contract you must be aware of.
Involved Parties
These refer to the borrower and lender. The agreement includes their names, addresses, and contact details.
Severability
This provision clarifies that the terms in the contract are independent. If one term is deemed invalid by a court, it does not affect the enforceability of other terms.
Entire Agreement Clause
The clause outlines the final agreement, replacing any previous agreements from negotiations. It establishes the final agreement terms.
What is the Loan Agreement Review Process?
Here is a step-by-step guide to review a loan agreement:
Step 1: Read the Entire Contract
Thoroughly go through every section of the agreement. Take notes of the sections that might need more clarification or further discussion.
Step 2: Verify the Loan Terms
You should check if the contract accurately reflects the terms, you agreed upon during negotiation. Additionally, ensure there are no mistakes in the loan amount, interest rate, repayment schedule, etc.
Step 3: Consider the Potential Risks
You must evaluate the payment terms and potential risks associated with the loan. Ensure you can handle the repayments without feeling any financial burden.
Step 4: Be Ready to Negotiate
If you find any terms in the agreement that you think is unfair, discuss with the lender and renegotiate the terms and ensure that the terms are mutually aggregable.
Step 5: Seek Legal Counsel
Another way of reviewing your loan agreement is by getting legal advice from a counsellor. Getting a legal advice can provide crucial insights and help you make an informed borrowing decision.
Also Read - Personal Loan Agreement - Things to Know Before Signing It
Benefits of a Well-Structured Loan Agreement
Here are the benefits of a well-structured loan agreement:
- Offers Clarity of Terms and Conditions
It clearly states the loan amount, interest rate, and repayment schedules. Thus, it reduces the chances of misunderstandings and disputes in future.
- Facilitates Negotiation for Customisation
A loan agreement allows the grounds for customisation to meet the unique needs of both parties. It can include permit provisions like early repayment or variable interest rates.
- Evidence in Legal Disputes
In the unfortunate event of a legal dispute, this agreement serves as crucial evidence as it demonstrates the loan, agreed terms, and expectations of both parties.
Also Read - What is Personal Loan? Things You Should Know
To Conclude
Being aware of the terms and conditions mentioned in the loan agreement is vital before you opt for a loan. Keep in mind that once you sign the loan agreement, you must adhere to its terms. It is wise to compare various lenders and opt for a trustworthy one like Poonawalla Fincorp, one of the leading NBFCs in India.