Whether you are an individual giving a personal loan to a friend or a commercial bank lending to its client, it is advisable to have a legally binding contract that spells out the terms of the loan. To ensure all areas are covered in the document, you need to follow these best practices.
Title: The title identifies the document and lets anyone who reads it understand what it is. Personal loans may have a simple title like “Loan Agreement.” Commercial banks on the other hand will include their logo, address as well as the title that identifies the document.
Parties: The lender and the borrower need to be identified in the document. This requires the full legal name is used as well as a physical address and contact details like phone number and email.
Dates: The date on which the loan is offered needs to be included as well as when the borrower is expected to commence payment.
Amount: The amount of money being lent should be indicated as well as the interest expected, the total sum to be paid at the end of the term as well as installments that will be made.
Length of Term: The borrower needs to know how long they have to complete payment of the loan.
Collateral: If any collateral has been agreed upon, it should be mentioned.
Default Provisions: Sometimes a borrower may default on an installment, such a situation needs to be addressed in the agreement along with possible action that may be taken.
Cancelation Policy: Most banks have a cancellation policy and this needs to be stated and explained in the agreement.
Jurisdiction: Since different states have different laws on lending and borrowing, it is important to state the laws that apply to the agreement.
Signature: There should be space provided for the signatures of both parties as well as a witness or two.
Terms and Conditions: Some lenders may have certain conditions that need to be met before the loan can be advanced. For example, if the loan is for construction of a commercial building, they may require a certain percentage of the work to be completed before more money is imbursed. Such conditions need to be included in the document.
Loan agreements should be treated like other legal documents. Avoid fancy font styles and stick to simple but effective styles like Times Roman and Arial. The size should be legible between 10 and 12 point.
Use easy-to-understand terms and avoid any ambiguous statements that may be open to misinterpretation. It is also important to spellcheck the document. This avoids errors that may create confusion as well as provides a professional touch.
Digital signatures make closing the deal move faster and save money that might be spent on courier services. However, confirm first if digital and e-signatures are considered legally binding in the jurisdiction the agreement will be subject to.
To save time and ensure consistency and minimize error, use templates to design the document. Templates are usually designed by professionals or using an already created document as a blueprint for the template.
More corporations are using document automation software as a solution for creating different documents. Since the content of a loan agreement is mostly the same, automating the process is a great best practice especially when this document is used often.
Although the main color for this document is black and white, institutions like banks may choose to add their brand colors to the document. The background for the title may be colored as well as the footer and edges of the document. Color is mainly for branding purposes.
Loan agreements do not have to be very long, but they must capture all the important details of the agreement. The best way to ensure you do this is to plan the document and create a template for it. Templates are the best guides for generating perfect documents.
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