Area of Law: Business & Corporate Law
Answer # 0307
Loan AgreementRegion: Ontario Answer # 0307
What is a Loan Agreement ?
A Loan Agreement is a contract made between a borrower and a lender. It outlines the specific terms of the loan, such as the interest rate, date of repayment, and security or collateral for the loan. These agreements can be quite simple, or they can be quite complex depending on the amount of the loan and the overall terms of the transaction. Loan Agreements can be oral or in writing, however, oral agreements are more difficult to prove and enforce.
A Loan Agreement, like all contracts, requires that there be an offer, acceptance, and consideration to be binding. Loan Agreements can be used in transactions between individuals, corporations or other legal entities. They can be used for business purposes (e.g. small business loan) or for private financing (e.g. to buy a vehicle).
Although payment terms can vary, common payment terms are:
- lump sum payment on or before a specific date
- monthly payments of principal only
- blended monthly payments of principal and interest
Essential features of a Loan Agreement
A Loan Agreement includes information, such as the:
- names of the parties
- date when the loan begins
- amount of the loan
- rate of interest and frequency it is calculated (e.g. daily, monthly, yearly)
- payment terms
- details or reference to collateral that is being given (if applicable)
What is collateral ?
Collateral, also known as security, refers to property that is used to secure the loan should the borrower default. Most loans from financial institutions, such as banks, require collateral. Collateral is also usually required in transactions where the loan is being made by a seller in order for the borrower to purchase the property, such as a car dealership offering loans to its buyers.
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