The majority of individuals in India opt for a loan for various purposes like vacation, marriage, buying property etc. But still, the majority of them haven’t understood the loan agreement. It is an important document that establishes the relationship between lender and borrower.
The loan agreement aims to protect the lender if the borrower doesn’t pay the loan. It’s always advisable to have a loan agreement even if you are giving a loan to a friend or family member. This is because it serves as a legal document if any dispute arises. In this blog, we will help you understand your loan agreement.
A loan agreement is a formal contract between the lender and borrower. It specifies the terms, conditions, and obligations related to the loan. The loan agreement has complete details about loan terms and conditions. This includes principal amount, interest rate, amortization period, terms, fees, payment terms etc. Loan agreement is considered as a legal document to settle disputes between the borrower and lender.
In order to understand your loan agreement, you should know about the various components of a loan agreement. Let’s have a look at some of the major components of the Loan Agreement: -
A Loan agreement will have mention of the loan amount, which also means the principal amount. The documents will also specify the duration for which the loan is granted.
You should have a proper understanding of the interest rate on the loan while signing the agreement. It gives you an overall idea of the borrowing cost. An agreement states the interest rate that you need to pay, along with the principal amount. In addition to this, it also mentions penal interest or additional charges that you will be paying in case of default.
The repayment clause is one of the most important parts of the loan agreement. This clause specifies how and when the loan needs to be repaid by the borrower to the lender. The repayment can be lump sum or on a periodic basis. When it is periodical, it will specify the number of instalments due, and the date of the instalment due.
Do check the repayment duration to understand what time you will get to repay the loan. Loans that have a longer duration come with smaller EMI. Whereas loans with shorter durations come with higher EMI. The loan duration should be in line with your repayment capacity so that you can pay the EMIs without any burden.
If you pay the loan early before the due date, then it is considered a prepayment. Prepayment of a loan comes with penalty charges. The penalty is levied on the borrower to compensate the lender against the loss of interest.
This section mentions the assets that you have provided as security for the loan. This happens in the case of a secured loan, where you have to provide some asset like a house or vehicle, as collateral. If you make a default, then the security pledged is used to recover the loan amount. If you pay the full loan amount as per the conditions, then the pledged asset is returned to you.
Here is how one can review the loan agreement: -
First of all, you need to go through each section of the agreement. You can also take note of sections that may need more clarification.
Do verify that the contract has the same terms as agreed upon during negotiation. Also, make sure there are no mistakes in the loan amount, interest rate, and repayment schedule.
You should analyse the payment terms and potential risks associated with the loan. Make sure that you can handle the repayment without any financial burden.
Talk to the lender about any conditions in the agreement that you believe are unjust and revise them so that both parties can agree on them.
Obtaining legal guidance from a counsellor is an additional method of examining your loan agreement. Getting legal counsel can give you important information and assist you in making a well-informed borrowing choice. It will give you a clear picture of the agreement. You can also get your doubts cleared in this way.
Before signing the loan agreement, one should be aware of the loan terms and conditions. Because once you sign the agreement then you have to follow the terms. You should keep the duration as long as it makes your loan repayment affordable.
If you find any condition that is unjust, then negotiate with the lender and get it revised. You can also take legal help to understand your loan agreement if the need arises.
