What are loan agreements?

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A loan agreement is a contract between two parties outlining terms of a loan issued by alender to a borrower. Sometimes called a loan contract, the loan agreement describes the obligations and responsibilities of the parties to the loan: the lender, the borrower and applicable third parties.

With some financing or loan programs, particularly in the real estate finance arena, the loan agreement is often called a promissory note or loan note. Loan agreements are used with a variety of loan products, from commercial and business financing to consumer loans such as personal loans, automobile loans and cash advance loans.

Elements of a loan agreement

Loan agreements are typically created and provided by the lender, and each lender uses its own lending criteria, guidelines and requirements when developing its standard loan contract.

In general, however, loan agreements typically include the following basic loan features:

  • Identifying the parties involved. With most loans, there are only two parties involved in the loan: the borrower and the lender. These parties must be clearly and distinctly identified. This starts with the use of the legal names of individuals and the official business name of the lending institution. In addition, the contact addresses of these parties are usually also included in the agreement, especially for the delivery and receipt of legal notices. Some loan agreements may also include third parties, such as trustees with certain mortgage loans.
  • Identifying the loan collateral. With secured loan programs, the borrower is typically required to provide an asset of value as security for the loan. With standard car loans and automobile title loans, the collateral is usually the vehicle’s title or pink slip. With pawn loans, the collateral is the personal property being pawned. And with secured credit cards, the collateral is the security deposit that the borrower provides. Regardless of the collateral, the secured loan agreement must identify the collateral and how it may be used by the parties.
  • Loan terms.The basic loan terms are the loan principal amount, interest rate, maturity date (term) and, when applicable, periodic payment schedule. In addition, the loan agreement may also spell out specific penalties, such as those for late payments, returned checks, escrow requirements and lender collection expenses.
  • Borrower obligations. Loan agreements will normally reiterate the borrower’s obligations with regards to the loan. The fundamental borrower obligation is usually to pay back the loan, along with all interest charges and applicable loan fees. Some loans, however, may include additional borrower obligations, such as maintaining the security property for the loan (as in the home with mortgages and the vehicle with car loans).
  • Lender obligations. The loan agreement will also describe the lender’s obligations. This basically starts with the lender providing the approved loan funds.
  • Default provisions. Finally, most loan agreements will also describe what options and procedures are available to the lender should the borrower default on the loan.

Loan agreements may also be required to follow specific state and federal regulations that regulate that lender and the specific loan being provided. This often involves the inclusion of required disclosures about the loan terms and costs.

Executing the loan agreement

To be a valid, the loan agreement must meet all the legal requirements of a valid contract. This includes the formal acceptance and execution of the agreement by both parties.

Depending on the loan program and lender, the loan agreement may be signed when the loan is closed and funds issued. Other loan programs, however, will have the borrower sign the loan agreement prior to final underwriting and funding.

Some loan programs and lenders may also require that a notary public sign and notarize the signed loan agreement, but not all. A notary public is an individual licensed to authenticate agreements between parties.

Loan agreements can contain a variety of loan terms and definitions and helps to establish the financial relationship between a borrower and a lender.  Loan agreements may sometimes contain language and legal terms not commonly used by a consumer. Consequently, borrowers should review the entire loan agreement package, conduct their due diligence and speak with a financial advisor before signing a loan contract.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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