People enter into loans all the time whether for their business – such as a loan to buy a new piece of machinery – or your personal life – such as a loan to help pay for a new car. Despite this, many do not know how to draft a loan agreement or which terms to look out for when reviewing a loan agreement.
This article will provide you with a comprehensive overview of how to write a loan agreement and will cover the following:
What is a loan agreement?
What are the different types of loan agreement?
Why have a loan agreement?
How to write a loan agreement?
Make sure to read till the end where we will provide you with free template loan agreements for you to navigate your business and personal life with ease and confidence.
A loan agreement is a contract between a borrower and a lender.
Loan agreements serve as a written repository of the terms and conditions based on which a lender has agreed to lend money to a borrower. Loan agreements specify, amongst other things, the term of the loan, the repayment procedures and details of any interest payments payable by the borrower on the loan.
Loans can be bilateral or syndicated. Bilateral and syndicated loans differ based on the number of lenders involved.
For a bilateral loan, there is only one lender – often a single bank or a single financial institution. Overall, there are only two parties involved in the transaction – the borrower and the lender.
For a syndicated loan, there are multiple different lenders involved – a number of banks or a number of financial institutions. Each lender puts up a portion of the loan which collectively goes to the borrower. This is usually when there are large sums involved – an individual bank does not want to risk making a loan of such a large sum to a single borrower. Thereby, many banks provide smaller amounts that when taken together provide the borrower with the borrower's desired amount.
Loans can also be distinguished based on whether they are commercial or personal.
A commercial loan agreement is an agreement between a borrower and lender which is made for business purposes. In a commercial loan agreement, an individual or organisation enters into an agreement with a lender, whereby the individual or organisation agrees to particular terms and conditions, for instance as to the loan’s use and repayment, in exchange for the lender providing the money.
Most often, the lenders for such commercial loans will be a bank or financial institution. Such financial institutions and banks will have their own standard form of the loan agreement, approved by their legal teams. It will be very difficult for borrowers to negotiate changes as to the terms found in these standard form agreements.
A personal loan binds a single individual. It does not bind any group, entity or other organisation this single individual represents. The sum of money borrowed by a person through a personal loan can be used for any purpose. As personal loans are more flexible and not tied to a specific purchase or purpose, they are often unsecured. This means that debt is not related to any assets, such as home mortgages or car loans.
The lender in a personal loan agreement can be a financial institution, bank or even individuals such as family members or friends. As with commercial loans, if the lender is a financial institution or bank, these organisations will generally have standard form loan agreements which have been approved by their legal teams. It will be very difficult for you as a borrower to negotiate many terms as part of this standard form agreement.
However, if the lender is an individual – such as family members, friends – the borrower has more scope to negotiate on the terms of the loan agreement.
As stated, a loan agreement is a written repository of the terms and conditions based on which a lender is willing to make a loan of money to a borrower.
Having this written repository of terms protects the lender – it makes it easier for the lender to enforce the agreement should the borrower not make payments in accordance with the agreement.
Additionally, the borrower will also likely find a written loan agreement useful because it spells out the specificities of their rights and obligations under the loan giving them greater clarity and increasing the likelihood of compliance with the agreement itself.
Invariably, the exact terms and conditions found in a loan agreement will vary depending on a variety of circumstances – such as the amount being loaned, the financial health of the borrower – most loan agreements all feature the same core terms and provisions.
These core terms and provisions include the following:
Definitions and Interpretation
Representations and Warranties
Events of Default
As with most other agreements, loan agreements typically start by defining particular terms used in the loan agreement.
Ensuring these definitions are both accurate and precise is key. This is because many of these terms will be repeated throughout the agreement and will thereby influence the meaning of many terms in the agreement.
Other rules as to interpretation are also featured in this section. This part, in effect, describes whether the use of any particular language in the agreement is to be limited to a particular signification or not.
For example, a term will likely be included stating that any use of the singular form should be interpreted as including the plural form. Furthermore, the use of any particular gender should be interpreted as including the other gender.
The next stage in a loan agreement typically outlines how the loan is to work. Amongst other things, this section will include details such as:
The type of loan agreed,
The principal sum loaned under the agreement
Terms governing interest and other fees will also be included.
The repayment arrangements
Particular attention should be paid to the different repayment arrangements. This is because of the many variations of repayment arrangement which may be proposed by a lender. Some such variations of repayment arrangement include:
This arrangement involves the payment of the principal and interest at regular intervals throughout the lifetime of the loan.
For example, every month the borrower may make $500 worth of payments. This might be broken down into $300 being contributed to the outstanding principal sum and $200 being paid as interest.
This repayment arrangement involves payments of interest being made at regular intervals. The principal, however, will not be paid off at regular intervals. Rather, the principal sum will be paid off in whole upon maturity of the loan.
Under this payment arrangement, the entire amount, including both interest and the principal sum, will be paid at once on a specific date.
Under this arrangement the entire amount, including both interest and the principal sum, is due whenever the lender requests repayment of this sum.
Next, a section outlining the conditions precedent of the loan is often found. The conditions precedent section outlines particular conditions that must be met or events that must happen before the loan can be considered binding between the borrower and lender.
The specific conditions that must be fulfilled before the loan is considered binding will depend on the loan at issue.
Common conditions will, however, include firstly the production and delivery of certain documents as specified. Or, the provision of assurances that particular events have occurred.
Representations are statements, true on the date of making the statement, made by the borrower to induce them to enter into a contract. Warranties are statements of fact, stated to be true on the date of the contract.
Representations and warranties are used by a lender to reduce the risk in lending to the borrower. They allow the lender to gather important information – usually information concerning the financial standing - about the borrower.
Lenders also often seek to ensure that the statements of fact made through the representations and warranties remain true throughout the lifetime of the loan. Lenders will do this by specifying that the representations and warranties be restated by the borrower to the lender at some interval – e.g. every calendar month.
The borrower should resist any attempt to have the representations and warranties restated at an interval or deemed repeated since the result could be that the loan becomes, in effect, a demand loan as a result of circumstances outside the borrower’s control.
With regards to representations more generally, the borrower should try to negotiate to have any representation regarding the accuracy of any information provided by it so as to exclude oral information and information casually supplied.
A covenant encompasses positive and negative duties imposed on the borrower to be fulfilled throughout the term of the loan. Covenants, therefore, have a continual effect throughout the term of the loan
They are used by the lender, during the lifetime of the loan to monitor the activities of the borrower and stop the borrower from taking any action that may make it less likely that the loan will be repaid. The aim in doing this is to ensure that the borrower remains as creditworthy at all times during the period of the loan agreement as when the lender made the initial decision to make the loan.
Considering this purpose of covenants in loan agreements, it is not surprising that commonly featured covenants in loan agreements impose a positive duty on a borrower to provide information regarding its financial position to the lender.
Generally, covenants are very onerous. This is because by imposing a negative duty - a duty not to do something - or a positive duty - a duty to do something - they restrict the freedom of the borrower to conduct its business or personal affairs with complete freedom.
To limit how onerous a covenant is, any undertaking to provide lenders with information under a covenant should be limited so as to exclude information:
Reasonably considered by the borrower to be of a confidential nature;
Which would require the consent or approval of a third party;
Which would necessitate similar disclosure being made to the public
Loan agreements have a section outlining particular ‘events of default’. If these stated events occur, then the lenders can exercise their remedies including accelerate the repayment of outstanding debt, enforce security interest and cancel any further amounts agreed to be conveyed to the borrower.
Generally, the borrower should negotiate ‘grace periods’ where possible. They should be negotiated to run from when notice is received by the borrower of the breach constituting the event of default rather than from when the relevant breach occurs.
Furthermore, the borrower should also negotiate to include in the loan agreement a provision to the effect that a loan can only be accelerated when the relevant event of default has occurred and is continuing. Otherwise, the banks might be able to accelerate despite the relevant breach being remedied – which is completely inequitable.
Loan agreements will also include other miscellaneous, ‘boilerplate’ provisions.
Boilerplate provisions are a standard set of clauses that appear at the end of every contract.
Important boilerplate terms in a contract include those specifying details regarding the provision of notices, the execution of the agreement in counterparts, the governing law and jurisdiction of the agreement, the survival of certain provisions etc.
For an in-depth explanation of boiler-plate clauses, please refer to our dedicated blog entry concerning such boiler-plate clauses. You can find this blog at this following web-address: https://docpro.com/blog62/contract-terms-important-boilerplate-language-in-an-agreement
It is clear that loan agreements are difficult to write. It is therefore advisable that you use a template to help write a loan agreement.
DocPro offers comprehensive loan agreement templates suitable for commercial, personal and other purposes.
You can find and select a suitable commercial loan agreement at the following web address:
You can find and select a suitable personal loan agreement at the following web address:
Disclaimer: Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.
DocPro Legal is a team of legal professionals with a passion for making quality documents and legal contract templates widely available to the public through cutting edge technology. Our lawyers are qualified in numerous common law jurisdictions including the United Kingdom, Australia, New Zealand, India, Singapore and Hong Kong. We have experience in major law firms and international banks with expertise in business, commercial, finance, banking, litigation, family, succession and company laws.
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