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Basic elements of a Loan agreement

by 16/07/2017 19:51:00 0 comments 1 Views

By Elizabeth  Adegbesan

ONE of the documentations for obtaining loans from financial institutions is the Loan Agreement.

Though very important with serious implications for the transaction, most borrowers usually do not pay adequate attention to studying this document to understand the meaning of the terms therein and how it will likely affect the loan repayment.

A loan agreement is a contract between a borrower and a lender which governs the mutual promises made by each party. There are many types of loan agreements, including “facilities agreements,” “revolvers,” “term loans,” “working capital loans.” Loan agreements contain list of the various mutual promises made by the parties involved in the transactions.

Prior to entering into a loan agreement, the “borrower” first makes representations about his affairs surrounding his character, creditworthiness, cashflow, and any collateral that he may have available to pledge as security for a loan. These representations are taken into consideration and the lender then determines under what conditions (terms), if any, they are prepared to advance money.

While the structure and elements of loan agreements is determined by the type of loan involved, the following are the basic information.

 Basic elements of loan agreements

The important elements of a loan agreement are as follows:

Loan and Terms: This refers to the loan amount and the purpose for which it was granted.

Tenor: This is the time limit for repaying the loan as well as interest rate charge.

Repayment:  It is a statement stipulating that obligates the borrower to repay based on terms contained in the offer letter.

Interest Payment and Capitalization: This specifies the interest rate charge for the loan, time limit for interest payment. It also stipulates conditions under which unpaid interest will be added to the outstanding loans, which is known as interest capitalisation.

 Events of default: This states the penalty that a borrower would bear when the loan is not paid at the fixed time of payment or on demand. In some commercial banks, a grace period of 14 days is allowed after the due date.

Set off and Lien: This is a statement indicating the right of the lender to keep possession of property belonging to the borrower until the debt is fully repaid.

 Assignment: This indicates   whether the lender or borrower has the power to assign any of his or her rights and power under the agreement.

 Amendment clause: This clause gives the bank a right to amend any conditions of the loan without informing.

Why you should read loan agreements

Most individual borrowers don’t read the loan agreement because it is lengthy and they easily get bored of the banking terms therein. The result is that they sign loan agreements that may be unfavourable to them. Among other things reading loan agreement reduces the risk of taking a loan with conditions that makes it difficult for you to repay.

It reduces the possibility of transaction breakdown as recently witnessed between Etisalat and consortium of lender. Also the loan agreement is the final reference for any potential dispute between you and the bank in future.  That is why you must devote time to read it carefully, and ask your bank to explain any term or condition you do not understand.

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