It’s a lender’s responsibility to draft the contents of a loan agreement. For this reason, it’s the lending party’s goal to provide all the necessary terms of an agreement relevant to the transaction. Incomplete clauses or details in your contract can lead to prolonged back and forths. On the other hand, failing to indicate important information can put you at fault and at a disadvantage in fulfilling the contract’s terms.
Given the inconveniences that incomplete or incorrect clauses can bring forth, it’s crucial to know the key points you should include in a loan agreement.
What to include in your loan agreement
It’s important to supplement all the essential information to help all parties about their liabilities When making your own loan agreement. This ensures transparency among all signatories, preventing any miscommunication or mistranslation of terms essential in the loan’s borrowing and repayment conditions.
While drafting your loan agreement, here are five clauses you should define:
Interest rate
An interest rate clause in a loan agreement will set out the borrowed amount’s interest rate. Although it’s easier to set a fixed rate for the borrowed amount, it’s also possible to set a floating rate. This percentage depends on the benchmark rate and the interest rate margin you’ll set. For example, lending companies set the benchmark rate as the bank bill swap rate, which depends on the Reserve Bank of Australia’s cash rate target.
Prepayment conditions
If a borrower can repay the loan at an earlier date, you should have a prepayment clause. This ensures that the borrower has the right to follow flexible payment deadlines and allows them to avoid paying from the breakage cost. Loan agreements must have a prepayment clause, so ensure that your repayment dates are set with these conditions in mind.
Definition of the loan agreement
Loans can either be uncommitted or committed loan agreements. Committed loans make the lender obligated to contractually lend the assigned amount to the borrower under specific condition precedents (CP). This ensures a more formal transaction for a secure investment on the lender’s part, especially for loans that request a considerable amount of capital. On the other hand, uncommitted loans will not have strict CPs that a borrower needs to observe. Although there are no preliminary conditions to satisfy before receiving the loan amount, this usually entails heavier consequences on missing repayment dates or higher interest rates.
Restriction of the loan agreement
A loan can be syndicated or bilateral, limiting a lender’s capacity to agree with more than one borrower. Bilateral loans restrict the borrower to one loan contract through their lender of choice. In contrast, syndicated loans allow two or more lending entities to provide for one or several borrowers. It’s more common for individuals seeking personal loans to get bilateral loans. Syndicated loans are more applicable to business entities due to the high amount they intend to borrow.
Events of the default
The events of the default will detail the specifics of violating the terms of a fixed-term loan. This includes insolvency, breach of the loan agreement and non-payment offences. It’s advisable to consult with a legal expert on the proper penalties you should assign for each specific offence.
Conclusion
Borrowing and lending money should be a formal transaction, whether you’re offering it to a family member, co-worker or client. This is why it’s necessary to draft an official document so that all parties will be legally bound to observe the terms indicated appropriately.
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