If you’re considering loaning money to an individual or a business for any purpose, it’s wise to pause and consider what documentation should be in place to protect you. Even if you know the people involved on a personal or close business level, it’s never a good idea to loan money on the strength of their word only. It’s far better to have a legally binding contract for repayment; this is where Loan Agreements come into play.
In this article, we’ll discuss the fundamental aspects of a Loan Agreement: its purpose, benefits and essential components. You’ll thoroughly understand why Loan Agreements are employed, their advantages and the crucial elements that should be included in their formulation.
What is a Loan Agreement?
A Loan Agreement is a contract between two parties, the lender and the borrower, which records the terms of a financial loan and details the precise terms for its repayment.
How does a Loan Agreement help?
The document provides various benefits to both parties. The most obvious advantages of using a Loan Agreement are as follows:
- Establishes absolute certainty regarding the arrangements
- Details the finer terms of the loan
- The perceived strength of legally binding contract – improving chances of repayment
- Acts as a key point of reference during dispute resolution processes
Given all the benefits above, it’s difficult to argue against using a Loan Agreement, even for loans of relatively modest sums.
What are the main terms a Loan Agreement should include?
A Loan Agreement should include all the terms of the loan, including the initial capital sum advanced, the applicable interest, the details of the repayment, including the amount, number, method and frequency of the repayments (i.e. weekly / monthly by bank transfer etc). It should also state whether there’re any penalties or conditions for early redemption of the loan.
The document should also clarify exactly who the parties are – i.e. their full legal names and addresses or company name and number (as applicable).
In other words, the legal capacity of the parties and, therefore, who’s legally liable for the loan and its repayment must be abundantly clear.
For example, if you have a loan to a company that’s repayable solely by the company, it should be in the company name and not the director’s or shareholder’s name.
If there are any guarantors for the repayment of the loan, then this should be set out in the Agreement, and the guarantors should also be asked to sign in their capacity as guarantors.
If there’s any security for the loan, then reference may be made in the Loan Agreement to such security and the relevant ancillary documentation.
For example, if the Loan Agreement is to be supported by a private mortgage over property – then the Loan Agreement may well reference this. Still, you would also need a separate Mortgage Deed (and Land Registry forms) to secure the debt against the relevant property.
What happens if they don’t pay me back?
If the borrower fails to pay back the loan as required by the terms of the Agreement, you can start proceedings in court for the debt. The Loan Agreement would then be a critical document in the court proceedings as it would be evidence of the loan’s agreed terms and repayment.
Naturally, if any guarantors or security are backing up the loan, you can look to this to improve your chances of repayment, particularly if the borrower needs more cash or assets to enforce against.
Wrapping up
If you’re contemplating the idea of lending money to an individual or business, it’s essential to safeguard your interests by establishing a comprehensive Loan Agreement. By enlisting the expertise of skilled solicitors, you can ensure that the entire process is handled correctly, providing you with peace of mind and significantly enhancing the likelihood of receiving full repayment for the loan.
Similarly, if you find yourself in the position of borrowing money and are presented with a Loan Agreement, it is crucial to have a qualified lawyer carefully examine its terms before signing.
LawBite boasts a team of experienced lawyers who specialise in advising on the creation or review of Loan Agreements. With their guidance, you can confidently navigate the complexities of this important legal document and secure your financial interests with confidence.
About the author
Ashley Gurr is an expert business lawyer at LawBite. Ashley has over 15 years of experience in private practice helping SMEs and in-house for an international consultancy group advising on commercial contracts and a multi-national utility giant in a contract strategy role.