What is a Credit Agreement?
A credit agreement is a formal document that legally binds a borrower and a lender. In this type of contract, the lender is obliged to provide products or services to the lender while the lender is legally contracted to pay back the cost of the products or services. However, the lender has the liberty to pay that cost back over a specific period of time.
A simple agreement may be created when borrowing funds to finance credit cards, mortgage, vehicles, property, tuition fees, and other kinds of loans.
How to Write a Credit Agreement?
Today, the average American under the age of 35 has about $67,400 in debt. And older age groups have higher debt averages. As a lender, it is your responsibility to take this into account in the creation of your credit agreements. Read the following steps that specify how you can make one instantly.
1. Conduct A Credit Check
Credit checks are essential before any type of loan is approved. With the permission of your clients, make sure to diligently run a credit check for any loan applications. Review their credit reports thoroughly before vetting them to be part of loan recipients.
A customer’s annual credit report allows you to see his/her financial status and capability of paying back the loan. Doing this simple preliminary step can save your company countless financial nightmares in the future.
2. Use Clearly Defined Payment Terms
A good credit agreement revolves around the payment terms specified on the contract. Most lending firms and financial institutions will develop their own payment terms ahead of time and it is up to the client to agree to these terms.
If your client wants to renegotiate the terms of the agreement, inform him/her of the operating rules of your lending company. The agreement should include the loanable amount, the interest rate, the payment schedule, forbearance rules, and other relevant information. Failure to include these basic components may make the agreement invalid.
3. Write Down the Payment Schedule
An effective loan or credit agreement is one that makes a borrower care enough to make regular payments. One way to do this is by creating simplified payment schedules that a consumer can easily follow.
For example, you may add a table that lists down the monthly payment amount and the payment due date. By seeing this visual tool, borrowers may visualize the things that they would do to completely pay off the loan.
4. Comply With Local or State Lending Laws
Different states and countries have different rules on how lending companies should operate and how they should structure their corresponding credit agreements. Consult your attorney before implementing any agreement template or instituting payment terms on your sample agreement. Also, further compliance with the Fair Credit Reporting Act and the Truth in Lending Act may be needed.
5. Add Clauses in Cases of Contract Breach or Default
Protect your business from bankruptcy by adding clauses on contract breach and/or default in your agreements. This way, if a client fails to make payments or totally does not make any payment, you are able to pursue a legal alternative to get your money back.