Ever wondered what a loan agreement looks like? Or are you only worried about whether you will receive approval should you apply for the loan?

    There are so many factors to consider before you sign that loan agreement. You need to carefully understand what you are binding yourself to and do not take reading that contract lightly, it could save you thousands of rands.

    It’s that time when people usually make big decisions. Whether it’s thinking about getting a loan to renovate your house, get married, or have enough money to put your child through varsity the upcoming year. You still need to understand what exactly you are signing for.

    We know that loan agreements are binding contracts between two or more parties, but when you are on the receiving end, you tend to be more excited about getting approval than the actual paperwork. You then just scan through the documents and sign without thoroughly reading the contract.

    That kind of behaviour needs to stop. You need to take time to read and understand your loan agreement. This is to avoid financial surprises 6 months down the line when the repo rate goes up and your instalment goes up as well.

    When things like this happen, and you’ve read and understood your loan agreement, then it rarely comes as a shock even though you might feel the financial burden.

    Loan Agreement and What it’s For

    A loan agreement’s primary goal is to spell out what each party is agreeing to, what duties they each have, and how long the agreement will endure.

    Governing laws must be followed in a loan agreement to protect both the lender and the borrower in the event that any party fails to uphold the terms of the loan.

    Depending on the type of loan, state or federal laws will apply to the performance and responsibilities that both parties are obligated to fulfil.

    Reasons for using Loan Agreements

    Due to the significant financial commitment involved in borrowing money, a structured mechanism is in place to ensure satisfaction for all parties. Most of the terms and conditions are common fares, such as the amount borrowed, interest rate, repayment schedule, collateral, late fees, and default penalties.

    • A loan agreement is evidence that the money was borrowed and not given as a gift.
    • Loan agreements are particularly helpful when borrowing from or lending to friends or relatives. They stop disputes about the terms and conditions.
    • If the situation ends up in court, a loan agreement safeguards both parties. It enables the court to decide if the terms and conditions are being followed.
    • If the loan contains interest, one party may wish to add an amortisation table that outlines the loan’s repayment schedule and the amount of interest that will be paid with each payment.
    • Loan agreements typically specify the precise amount of the monthly loan payment.

    Interest Rate Determination

    When taking out a loan for a new home, car, or credit card for the first time, many borrowers are ignorant about loan interest rates and how they are calculated. The type of loan, the borrower’s credit score, and whether the loan is secured or unsecured all affect the interest rate.

    State and federal consumer protection regulations impose restrictions on the maximum amount of interest that a lender may charge without it being deemed to constitute unjustified and excessive usury.

    The loan’s terms and conditions or loan agreement will specify any interest payments. Interest comes in the form of a fixed or floating fee.

    Contract Length & Amortisation

    A lender’s dependence on an amortisation plan establishes the length of a loan agreement. Following an agreement between the lender and borrower on the amount of funding required, the lender will use the amortisation table to determine the monthly payment by dividing the total number of payments required by the number of payments to be made and adding interest to the monthly payment.

    It is in the borrower’s best interest to repay the loan as soon as possible unless there are specific loan conditions that penalise the borrower for early loan payment. The borrower pays less money if the loan debt is paid off faster.

    Pre-Payment Fees

    While aiming to repay a loan as quickly as possible is a prudent financial move, certain loans punish the borrower with pre-paid fees and penalties for doing so. Prepayment fees are frequently included in vehicle loans or subprime mortgage loans. They might also happen if debtors decide to refinance a car or house loan.

    Pre-payment fines are imposed to safeguard the lender, who anticipates receiving a specific return on his investment over a specific period of time. The lender would lose the interest he anticipated for the final two years of the loan, for instance, if the borrower repays a five-year loan in three years.

    Breach or Default

    A loan is deemed to be in default if the agreed-upon repayment schedule is delayed. In order to make up for any losses incurred by the lender, the borrower may be held accountable for a wide range of possible legal damages.

    The lender who has been breached or has defaulted may file a lawsuit, have the borrower responsible for court costs and liquidated damages, and even have assets and property attached or auctioned to recoup the loan. Additionally, the borrower’s credit report may include a breach or default of a court decision.

    There is so much more to loan agreements. If you want to see a sample loan agreement, please click here!

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