Only a few people master life without credit. With few exceptions, almost everyone takes out a loan to buy a car, finance a home purchase, pay college tuition, or cover a medical emergency. Loans are almost ubiquitous, as are agreements that guarantee their repayment.
Loan agreements are binding contracts between two or more parties to formalize a loan process. There are manyloan typesAgreements ranging from simple promissory notes between friends and family to more detailed contracts such as mortgages,self-credit, credit card and short or long-term advance loans.
Simple loan agreements can be little more than short letters explaining how much time the borrower has to repay the money and what interest can be added to the principal amount. Others, such as mortgages, are cumbersome documents filed as public records and allow lenders to repossess the borrower's property if the loan is not repaid as agreed.
Each type of loan agreement and its payment terms are subject to state and federal regulations designed to prevent illegal or excessive interest rates on payment.
Loan agreements typically include restrictive clauses, the amount of collateral involved, guarantees, interest terms and the period of time over which they must be repaid. Standard Terms should be clearly worded to avoid confusion or possible legal action. In the event of late payment, the outstanding debt collection terms must clearly state the costs associated with debt collection. This also applies to alternate users.
Purpose of a loan agreement
The main purpose of a loan agreement is to define what the parties involved agree on, the responsibilities of each party and how long the agreement will last. A loan agreement must comply with state and federal regulations that protect both the lender and the borrower in the event that either party defaults on the agreement. The terms of the loan agreement and the state or federal laws governing the performance obligations required of both parties differ depending on the type of loan.
Most loan agreements clearly define how the funds will be used. The law does not differentiate what type of loan is given for a new home or car, how a new or old debt is paid, or how binding the terms are. The signed loan agreement is proof that the borrower and lender agree to use the funds for a specific purpose, how the loan will be repaid and at what repayment rate. If the money is not used for its intended purpose, it must be immediately returned to the creditor.
Other reasons to use loan agreements
Borrowing money is a big financial commitment, so there is a formal process in place to achieve positive outcomes for both parties.
Most terms are standard rates (amount of money borrowed, interest charged, payment schedule, collateral, late fees, penalties), but there are other reasons loan agreements are useful.
A loan agreement is proof that the money in question is a loan and not a gift. This can become an issue with the IRS.
Credit agreements are particularly useful whenborrow or borrow from a family member or friend. They prevent discussions about conditions.
A loan agreement protects both parties if the matter goes to court. It allows the court to determine whether the terms and conditions have been met.
If the loan includes interest, one party may want to add an amortization schedule that explains how the loan will be repaid over time and what the interest is for each payment.
Loan agreements can specify the exact monthly payment for a loan.
It's safe to say that whenever you borrow or borrow money, a legal loan agreement should be part of the process.
Cash loan vs. fixed payment loan
Loans use two types of repayment: cash and fixed payment.
Banknotes are generally used for short-term borrowing and are often used when people borrow money from friends or family. Banks sometimes offer convenience loans to customers with whom they have an established relationship. These loans usually do not require collateral and are for small amounts.
Their main feature is how they are paid. Unlike longer term loans, payment can be demanded by the lender at any time, provided advance notice is given. The obligation to terminate is normally regulated in the loan agreement. Borrowing from friends and family may be a written agreement, but it may not be legally enforceable. Banks require loans to be legally enforceable. The overdraft is an example of a bank loan on demand: if you don't have money in the account to cover the check, the bank lends the money and pays the check, but you have to pay the bank quickly. , usually with a fine.
Term loans are often used for large purchases, and lenders often require that the purchased item, such as a house or car, serve as collateral if the borrower defaults. Payment is made on a fixed schedule, with terms defined at the time of loan signature. The loan has a due date by which it must be repaid in full. In some cases, the loan can be paid off early without penalty. In others, early repayment carries a penalty.
Legal information to be observed
All loan agreements must contain general terms and conditions that define the legal obligations of each party. For example, terms related to payment schedule, default or breach of contract, interest rates, loan guarantees and any guarantees offered must be clearly described.
When it comes to loan agreements, there are some standard legal terms that all parties should be aware of, whether the agreement is between family and friends or between lenders and customers. Here are four important terms to know before signing a loan agreement:
Choice of law:This term refers to the difference between the laws in two or more jurisdictions. For example, laws governing a specific part of a loan agreement in one state may differ from the same laws in another state. It is important to identify the state (or jurisdiction) laws that apply. This term is also referred to as "conflict of laws".
involved:These are personal data of the borrower and the lender, which must be clearly stated in the loan agreement. This information must include the names, addresses, social security numbers and telephone numbers of both parties.
Severability clause:This term states that the terms of the contract are independent of each other. Therefore, if a term of the contract is found to be unenforceable by a court, it does not mean that all terms are unenforceable.
Complete contractual clause:This term defines what the final agreement will be and replaces any agreement previously reached in negotiations, whether written or verbal. In other words, this is the final word and anything previously said (or written) no longer applies.
Determining the interest rate
Many borrowers in their first experience secure aLoan for a new house, car or credit card do not know the interest on the loan and how to calculate it. The interest rate depends on the type of loanborrower's credibilityand if the loan is secured orInsecure.
In some cases, a lender will require the interest on the loan to be tied to a tangible asset, such as a title deed or land title. State and federal consumer protection laws place legal limits on the amount of interest a creditor can legally charge without being considered illegal and excessive usury.
If the loan involves interest payments, as is the case in most cases, the terms will be specified in the terms of the loan. Interest rates are fixed or variable.
A fixed payment or fixed rate loan has an interest rate that stays the same for the duration of the loan payment. If you borrow money at an annual interest rate of 4%, you will pay the lender 4% per year on the outstanding balance until the loan is paid off. The amount of interest you pay will decrease over time as the balance is paid off and the principal payment increases. If you take out a $200,000 loan to buy a home, the monthly payment remains constant, but the portion of the payment that goes towards interest and principal changes each month as the loan balance decreases.
Variable rate interest rates, also known as variable rate loans, have interest rates that change over time. The interest level is based on a reference interest rate, usually a widely used index such as LIBOR, which changes regularly. Variable rate rates are adjusted regularly and are normally only used for complex loans, e.g. B. for variable rate mortgages.
Contract duration and amortization
The duration of a loan agreement is determined by the lender's confidence in a repayment schedule. After the creditor and debtor determine the amount needed, the creditor uses the amortization table to calculate the monthly payment, dividing the number of payments to be made and adding the interest to the monthly payment.
Unless there are specific loan terms that penalize the borrower for prepaying the loan, it is in the borrower's best interest to repay the loan as quickly as possible. The faster the loan debt is paid off, the less money it will cost the borrower.
Prepayment fees and penalties
While the goal of paying off a loan quickly is a financially sound practice, there are certain loans that punish the borrower with prepaid fees and penalties for doing so. Prepayment penalties are typically found inself-creditor in subprime mortgage loans. They can also occur when borrowers decide to refinance a home or car loan.
Prepayment penalties are levied to protect the lender who expects a certain rate of return on their loan over a certain period of time. For example, if the borrower pays off a 5-year loan in three years, the lender would forfeit the expected interest for the last two years of the loan.
Prepayment penalties are usually 2% of the loan amount due or six months interest. This can drastically affect the cost of refinancing a loan. Many subprime loans include prepayment penalties, which opponents say are aimed at the poor, who are typically those with subprime loans.
On the other hand, there are homes financed by government backed FHA loans. Federal law specifically prohibits prepayment penalties on FHA loans. The exception is when the borrower has a mortgage that includes a liquidation clause and the clause has been approved as part of the mortgage.
pattern or pattern
If a loan agreement is terminated late, theThe credit is considered overdue. The borrower may be liable for a large amount of possible legal damages to compensate the lender for the losses incurred.
The defaulting or defaulting creditor can file suit and hold the borrower liable in court for attorney fees, pay damages, and even have property and property seized or sold to pay off the debt. In addition, the borrower's account may be charged for default or violation of a court order.credit history.
Mandatory arbitration is an increasingly popular provision in loan agreements that requires parties to resolve disputes through an arbitrator rather than through the court system.
More than 50% of lenders include mandatory arbitration in their loan agreements, claiming it is faster and cheaper than going to court. Arbitration puts the final decision in the hands of one person who probably has more experience and legal knowledge than six jurors in a courtroom.
In most cases, binding arbitration clearly benefits creditors who have a lawyer specializing in this area of law on their side. The borrower often does not have an attorney or is underrepresented because attorneys are not guaranteed payment in arbitrations.
The borrower is even more disadvantaged if the arbitration is binding, that is, there is no appeal. The rules inFair Credit Reporting Lawand the veracity of the credit right do not affect the arbitration, which also favors the creditor.
Military personnel are particularly vulnerable to loan agreements that include mandatory arbitration. A soldier serving overseas may be unable to participate in arbitration or have competent representation and thus lose ownership of a car or other property. The referee's decision cannot be appealed, so there is no appeal if the decision goes against the soldier.
Before signing a loan agreement, read it carefully and, if it contains a mandatory arbitration clause, decide whether you agree to it to resolve any disputes.
Protection against usury and theft
several federal and state governmentsConsumer protection lawsProtect consumers from predatory lending and predatory lending tactics by lenders. The Truth-in-Credit Act, Home Settlement Act, and Homeowner Protection Act federally protect borrowers from predatory lenders.
Many states have enacted supplemental usury and consumer protection laws to protect borrowers. Both parties benefit because lenders pay reasonable interest rates and borrowers get much-needed credit.
Various federal and state consumer protection laws protect consumers from predatory and predatory lending tactics employed by lenders.
Promissory notes are similar to loan agreements, but they are not as complex. They are often little more than payment obligations such as promissory notes or simple reminders. Typically, the borrower writes a letter stating how much money he is borrowing and under what conditions it will be repaid. They are almost always used for small loans between people who know each other well.
Promissory notes are signed and dated and may be legally binding. Notes can be secured or unsecured. Secured loans provide collateral to the lender if the loan defaults while unsecured loans do not use collateral. They may, but need not, contain provisions for installment payments and interest.
Unlike loan agreements, which can contain complex payment terms, promissory notes are more like paper evidence that document that one person lent money to another and that the borrower agrees to repay the money within a specified period of time. , either lump sum or installments Used primarily to avoid financial misunderstandings and not to be confused with a loan agreement that contains a variety of legally enforceable terms and remedies.