What are loan contracts?

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A loan contract is a legally binding agreement between a borrower and a lender and must be entered into voluntarily by both parties. The specific details of the loan contract spells out the various features of the loan, especially the performance obligations of the borrower and the lender. To be valid, the loan contract must be signed by both the lender and the borrower – as well as meet all the legal requirements of a valid contract.

Also called a loan agreement, the loan contract is similar to the promissory note found with mortgage and automobile loans.

Regardless of what it’s called, the core element is the contract – which describes the obligations of the parties to the loan. The borrower’s basic obligation is repaying the loan according to the terms of the contract. The lender’s basic obligation is equally simple: it is to provide loan funds once the borrower is fully approved. But typical loan contract goes beyond just the basics.

Basic features of loan contracts

The loan contract between a borrower and a lender will include various features of the loan and the parties’ obligations. These loan features include:

  • Names and addresses of the borrower and lender
  • Loan amount
  • Loan terms
  • Payment schedule
  • Recourse clause

The legal names of the loan borrower(s), as well as their current address, are always included on the loan contract. Similarly, the lender’s legal name and address is likewise spelled out in the loan agreement. These identifying information are necessary to ensure proper communication. In addition, should judicial or other legal proceedings become necessary, this data will become key elements of any legal communications and due process.

Loan terms are also a critical part of the loan contract. Loan terms include the interest rate associated with the loan, as well as the length or term of the loan.

The payment schedule will identify when the monthly payments are due, the amount due and when the loan will be retired. The payment schedule will also indicate when payments are to be considered past due and the amount, if any, of late payment fees that will be charged.

The recourse clause in a loan contract usually describes some of the legal rights the lender will have in the case of non-payment or loan default. With secured loans, the recourse clause may include wording about how the lender may take possession of the loan collateral and use it to pay off the current loan obligation. Similarly, with unsecured loans, the recourse clause will describe some of the steps a lender may take in order to recover the amounts owed.

A loan contract, when signed by the borrower and a lender, marks the official date and time the agreement is in force.

Regardless of whether the loan agreement is signed on paper or signed digitally online, it can be considered a valid contract once both parties voluntarily agree to its terms and sign it (assuming that it passes all the legal requirements of a valid contract).

So loan borrowers must remember to carefully review the entire contract before signing. Borrowers always have the right to consult with an attorney before they sign any contract, let alone a loan obligation. And if there is any uncertainty about the loan terms or any loan-related documents, borrowers should consult their attorneys and address all questions before signing any documents.

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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