Explanatory Notes
Loan Agreement Form Template (to an individual)
Letter providing loan to an individual.
There are 10 paragraphs setting out the basic terms, including the loan amount, interest and payment/repayment provisions, plus a paragraph dealing with default.
EXPLANATORY NOTES
This is a simple agreement between a lender and an individual borrower. It sets out the basic terms upon which the loan will be made, the rate of interest and the repayment provisions.
The Agreement is in the form of a letter and that is just as effective as a formal agreement once the letter has been signed by the Lender and countersigned by the Borrower. From the Lender's point of view it is important that the Borrower does not, when returning the signed letter, attempt to qualify any of the terms - e.g. in a separate covering letter. In that case, the Lender should not proceed with the Loan until all the terms have clearly been agreed between the parties. The letter, when sent to the Borrower, constitutes an offer which needs an unequivocal acceptance in order for a contract to be created under English law. If the Borrower proposes a change to the terms, that action, technically, results in a counter offer being made so there is not at that stage any agreement.
Dealing with the various clauses:
1. AMOUNT
This sets out the amount of the loan to be made and provides for payment of the loan within 7 days of the Borrower returning the unqualified acceptance - see the comments above on this subject. The Borrower should, when returning the letter, provide details of his/her bank account.
2. REPAYMENT OF INTEREST
This sets out the interest rate and details of the amount and the relevant bank need to be inserted. Alternatively, the clause could simply say that the Borrower will pay interest on the Loan at the rate of 10% a year , or whatever figure is proposed. The clause provides for interest to be payable quarterly but it could be monthly, annually or some other period. It is sensible for a Lender to inform the Borrower on each interest payment date of the amount which is due.
3. REPAYMENT OF PRINCIPAL
This specifies the number of repayments of principal (as opposed to interest) which have to be made and when these are to start. Instead of the language used here, this paragraph could specify the amount of each repayment and the date - e.g. £1,000 on 1 January each year.
4. PREPAYMENT
This makes it clear that the Borrower can repay any or all of the Loan at any time. In the case of bank borrowing, a bank will sometimes charge an additional fee for early repayment or require the giving of a period of notice before prepayment but that is not the case here.
5. PAYMENT
This deals with the mechanics of payment of both interest and principal and the Lender should fill in the relevant bank account details.
6. DEFAULT
This clause, much shorter than would be the case with a bank loan, gives the Lender the right to call in the Loan if the Borrower does not keep up his/her payments or becomes insolvent or fails to pay his/her other debts - which is usually a sign of insolvency.
7. UNDERTAKINGS
This is a very simple clause which is designed:
(a) to prevent the Borrower giving security over his/her assets without the Lender's consent. A Borrower who grants security to his/her bank may not have any assets left to repay an unsecured loan such as the one covered by this letter;
(b) to ensure that (especially in the case of a relatively unsophisticated Borrower) legal advice as to the meaning and effect is taken before the letter is signed. It should be made clear to the Borrower that you will not countenance any attempts to vary/negotiate the terms of this letter. This requirement should give some protection against any subsequent attempt to challenge attempts to enforce the terms of the letter.
8. NOTICES
This makes it clear that any notice to be given under the letter must be in writing and specifies the method of delivery and the time that service of a notice is deemed effective.
9. ASSIGNMENT
The Borrower is not allowed to assign the debt to a third party without the Lender's consent.
10. WAIVER
This clause gives the Lender the ability to waive a breach without setting a precedent.
The letter does not deal with the governing law or the method of dispute resolution. If both Lender and Borrower are in same country, the law of the country will apply and any dispute will go to the courts - the best place where a borrower fails to meet his/her repayment obligations.
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Consumer – A person who buys or acquires goods or services usually bought for personal, domestic or household use.
Contract – A legal agreement – eg, between you and another party – for the supply of goods or services such as a credit contract.
Credit – The amount of money you’re borrowing. Credit can be:
- a loan, including cash loans
- where you’re buying goods that you’ll pay off later
- using a bank or store credit card to buy goods and services.
Credit contract – A contract that sets out the terms and conditions of the seller or lender providing the credit.
Credit sale – A type of credit contract where you buy goods with the right to use them and pay them off later – eg, by making monthly payments (instalments). This used to be called hire purchase.
Disclosure statement – Written information provided as part of your credit contract. It sets out key information about your loan or credit sale – eg, payment information.
Finance company – A company that lends you money or provides the credit for sellers offering credit sales.
Guarantor – A person, such as a friend or family member, who agrees to ‘guarantee’ the credit – that is, take responsibility for paying off your loan or goods if you can’t.
Goods – The things you buy – eg, a car, a stereo, carpet. ‘Consumer’ goods are goods usually bought for personal or household use.
Hire purchase – The old term for ‘credit sale’. The new term applies from 1 April 2005.
Lender – The company or organisation providing you with credit – sellers, finance companies, banks, money lenders.
Loan – Money you borrow from a bank, finance company or other source. A loan is a form of credit contract.
Revolving credit – Credit cards use a revolving credit system. You’re given a maximum amount of credit you can use, and have a set minimum monthly payment to meet. You can choose to use some or all of the total credit available, as long as you make regular payments.
Security interest – A right a lender may have over your goods – either your own goods you list as security when borrowing money (see Secured loan below), or goods you’re buying under a credit sale. This right allows the lender to seize and sell the goods if you don’t keep up your payments.
Secured loan – A loan where the lender asks you to list goods you own (such as a car or household goods). If you fail to repay what you owe, the lender can seize and sell the goods to pay off your debt to them.
Seller – The company or trader selling you the goods under a credit sale – eg, a retailer.
Unsecured loan – Where you don’t have to provide any security for the loan – eg, some personal loans from banks or credit card services.
