Typical Elements in a Loan Agreement
As you prepare to open a credit line, a credit card or even apply for a mortgage to buy a home, you will first need to complete a credit or loan application. Applications for credit can vary between lenders as well as by the type of loan being applied for. But most consumer loan applicants typically request the same basic information.
Lenders want to know who you are. This means providing the lender with your legal name, social security number and, sometimes, a photo I.D.
Lenders want to review your credit report to determine the level of risk they face by lending to you. Today, most borrower credit is usually stored, delivered and reviewed electronically, with a physical copy of the credit report being held in file or digitally stored with the lender.
Lenders want information on your job history and current income to determine your ability to repay the loan or debt. Your income and employment data allow lenders to determine job stability and to evaluate how much credit to extend to you, based upon gross monthly income.
For secured loans, such as home mortgage and automobile loans, the lender will want to assess the collateral being pledged or the property being acquired. The lender will then independently determine the collateral’s current market value. Should the lender be forced to foreclose or repossess the asset due to non-payment, the lender wants to make sure the asset is of sufficient value to offset possible losses.
That’s the application phase. Once your loan is approved the lender will issue your loan agreement. The loan agreement contains every single detail regarding your loan to make certain you’re aware of critical loan terms. In addition, lenders are required to fulfill government obligations regarding loan disclosures.
All loan agreements will identify the key terms of the loan being made, as well as describe the obligations of the lender and borrower entering into this agreement.
Typical loan agreements contain:
- The legal names and addresses of the lender and borrower
- The loan amount being issued or credit limit
- The interest rate applied to the loan
- The annual percentage rate
- The first payment date
- Full maturity date of the loan
- Frequency and date of payments
- How late payments are addressed
- Penalties for late payments
- The process by which the lender can recover their collateral due to non-payment
Loan agreements are designed to make every aspect of the loan crystal clear to the borrower. However, these agreements can be confusing at times. If you’re not sure what a particular clause or a document means, never hesitate to ask for clarification or assistance.
It’s better to know how your loan will work before you agree to the terms…not after.