It is important to know if you need to have a loan agreement in place to protect you while lending any money to anyone or provide services without any payment. Without having an investment loan contract in place to ensure that you will be repaid, you never really want to loan out any money, goods, or services. The general purpose of an investment loan contract is to layout what is being loaned and when the borrower or lender has to pay it back along with the payment method.
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What is an Investment Loan Contract?
An agreement that is a formal contract where the lender specifies the binding terms and conditions to which the borrowers must agree to receive a loan is termed as an investment loan agreement contract. This agreement also sets forth the amount of the loan, the borrower’s collateral, the repayment plan, term, and all the penalties like late fees in case the borrower defaults. A loan contract can be considered as a written agreement that is made between financial lenders and borrowers and where both parties sign the contract upon agreeing to the terms.
What is a Business Loan Agreement?
An agreement that is done between a business or a business owner and a lender or a lending bank is known as a business loan agreement. The loan is the amount of money that is borrowed by the borrowing business in exchange for security and other promises made by the borrower including a promissory note to repay. This agreement documents the promises of both parties that are involved which includes the promise by the lender who will pay the money and the promises by the borrower to repay that money within a specific date. A business loan agreement will have all the required provisions and clauses that are made to protect the bank and also the person taking the loan.
What are the Terms to be Considered in an Investment Loan Contract?
You may find a loan contract to be quite a complex document. Therefore, in case you are taking out or providing a loan, it is crucial to understand every aspect of your loan agreement. Understanding the agreement will ensure that you are not going to sign yourself to be legally responsible for something that you were not prepared for. The following will make you aware of some important key terms that are included in a loan contract and what you must consider about all of them.
A loan contract must consist of an interest clause that is crucial as it sets out the interest rate of the loan. There are mainly two types of interest rates: one is fixed fee rates and the other is floating fee rates. A fixed fee rate is generally set at a given number that will not change during the loan whereas a floating fee rate is based on an interest rate margin that is added to a benchmark rate.
The loan agreement must allow the borrower to repay the loan early and this is known as making a prepayment. It makes the loan more flexible and it should be allowed at the end of interest to avoid any payment of breakage costs.
Events of Default
Whether a loan is repayable on demand or is only repayable at the end of the fixed term is one of the key elements of a loan contract. In case a loan is repayable on demand, there will be no need for an “events of default” clause because the lender will be able to recall the loan at will which means that there is no need for the borrower to be contractually obliged to maintain certain covenants. But if the loan is a fixed-term loan, the loan contract must contain an “events of default” clause.
Committed or Uncommitted Loan Agreement
A particular loan can either be committed or uncommitted. In case a loan is committed, the lender is contractually obliged to lend the loan amount to the borrower and if the loan is not committed, there will no need for a certain Conditions Precedents schedule.
One of the key terms is related to the repayment provisions of the loan contract. Both parties must agree to a fixed repayment schedule in a loan contract and on some occasions, the lender may insist on an on-demand facility.
Secured or Unsecured
Most of the loan contracts are secured through an asset. But, in certain situations, it might often occur when a certain party in a transaction may agree not to secure the facility, therefore resulting in increasing the risk for the lender.