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What Is A Loan?

Loan is an agreement that binds a contract between two parties or may be more to give a go ahead to loan process. There are many types of loan agreements like housing loan, personal loan, education loan, automobile loan, short-term or a long-term loan.

What Is The Purpose Of A Loan Agreement?

The main purpose of a loan agreement between two parties is the term for which loan is taken and regulations under which agreement is prepared by loan giving party. The signed terms and conditions of the loan agreement is a proof between the borrower and the lender that they abide by the rules of the signed loan.

On Demand And Fixed Loans

On demand loans are generally based on short-term borrowing and they are often borrowed from friends or family. Banks also offer on demand loans to their long-term customers. A person is not required to mortgage anything against this loan as its amount and tenure is for a shorter period. Fixed loans, on the other hand, are given for a longer tenure and amount is also higher than short-term loans. Borrower has to keep his home or car or any other asset equivalent to the loan amount as collateral if in case he defaults to pay in future. This loan has a maturity dates and all the terms and conditions are signed beforehand.

Legal Terms To Be Considered

  • Parties Involved:

    This will take into account the personal information of the borrower and lender stated in the legal agreement. It includes the personal information like name, address, contact information.

  • Terms Of Agreement:

    All the terms and conditions of an agreement are independent of each other. Both the parties should abide by the terms and conditions. They should sign the agreement after discussing the terms and conditions in person.

  • Agreement Clause:

    This states the final clauses agreed between the two parties and it supercedes any other agreement that was made based on earlier negotiations.

Interest Rate

The interest rate is fixed after looking at the financial condition of the borrower and his credit score. Interest rate is either fixed or floating. A fixed interest rate remains unchanged during the whole tenure till the repayment of interest is done. Floating interest rate keeps on changing over a period of time. These rates are fixed periodically and generally used in adjustable home mortgages.

Agreement Tenure

The tenure of the loan depends upon the borrower’s capability to pay the loan within the given time frame. The lender will calculate the rate of interest that borrower has to pay monthly by dividing the number of payments that are required to be made and then adding the interest to the monthly payment.

Pre-Payment Fees And Penalty

If borrower decides to pay back loan quickly then surprisingly that is also a problem for him as he has to pay penalty in that case. Pre-payment fee or penalty is applied to protect the lender as he gets a certain return on loan over a certain amount of time. These penalties are usually 2% or may be more of the amount due on loan.

Documents Required For Applying For A Loan

  • 1) Proof of residence
  • 2) Proof of individual’s identity
  • 3) Latest bank statement
  • 4) Last 6 months salary slip
  • 5) Copy of property documents