People aim to receive loans when they wish to purchase things they are not able to afford at that moment. It could be to buy a dream home to finance one’s business. Under such circumstances, it is ideal to borrow the money after signing a formal loan agreement.

Verbal agreements regarding lending and borrowing money are hazy. Moreover, if things go sour due to any reason, it could prove to be disastrous for both lender and borrower. It is why an official loan agreement is the best course of action. It is a document signed between two parties to formalize a loan process. Moreover, it guarantees that both individuals do not breach legal guidelines.

What Is a Loan Agreement and Why Should One Use It?

A Loan Agreement is a formal and legal document between two parties, namely a borrower and lender. It usually contains all the information related to the total amount and the entire schedule for repayment. One can use such agreements to finance their business, purchase real-estate, or pay college tuition fee.

As a borrower or lender, you need a binding contract for checking out a loan. This binding contract enables the lender to take legal steps in case if his money is recouped. Also, this bilateral agreement confines the borrower for repayment as well.

It is not an uncommon contract. People use it as part of routine while lending or borrowing money for several reasons. Either it is scrawled on a stained napkin or made on a legal document, both ways, it aims to protect both parties and serves as proof.

Moreover, suppose you are lending money from a friend and are concerned that relationships will go sour. In that case, this loan agreement safeguards your interests. Loans containing a considerable amount of money and interests need a legal loan agreement involving an amortization table. This way, it highlights all the factors related to payments.

What Can You Use a Loan Agreement For?

The loan agreement clearly states the purpose for which it is used for. It is all based on the loan type and the terms involved. You can use a loan agreement for several reasons listed below:

  • Auto Loans for Purchasing Vehicles: It is used for auto loans, which ensures the security of the vehicle and, at the same time, puts the lender at less risk. Meanwhile, it also allows you to cash-out refinance for your vehicle if the lender has sent money straight to the seller.
  • Mortgages or Loans: It is needed for purchasing a home should follow the terms made on the agreement. It prevents you from facing likelihood conditions. For instance, if you miss the payments, the lender can show ownership of the property.
  • Student Loans: Students need loans to meet their educational expenses. Loan agreements designed for students are usually interest-free. The arrangement used for such purposes is supposed to be a little restricted. You can spend money on getting higher education, buying books, and renting.
  • A Business Loan: It is another reason for which a loan agreement is used. One can use it to operate a small business, to buy equipment, or for refinance purposes.

What Does a Loan Agreement Include?

The loan agreement is a document that covers all the vital information related to personal details to payment information. It includes the information listed below.

  • Lender and Borrower Details: It covers the details like either the agreement is made between the individual or group. It also includes the name of both parties, the address of members, a third-person or co-signed who signs the contract if any default is noticed.
  • Interests: One of the main sections that are included in the agreement is the interest charged by the lender. It shows the amount of percentage of interest. Also, it consists of a section where it is mentioned that if late payments affect the interest rates or not.
  • Amount of loan and Repayment Methods: It also includes the amount of money given by the lender to the borrower. It clearly outlines the repayment methods. Both parties decide whether the borrower will repay the amount in a single attempt or on a regular basis.
  • Collaterals: Indeed, it is a great way to secure a loan. The collaterals can be anything expensive. It may be a car, jewelry, a specific property.

What Is the Difference Between a Loan Agreement and Promissory Note?

The loan agreement and promissory have one thing in common that is both are related to money. A loan agreement is a more formal agreement than a promissory note. It offers a greater degree of protection to lenders.

While the promissory note is a simple small loan legally bound document and free of complex statements. It is less formal and used between two individuals who know one another. The Promissory notes are committed to paying letters that a borrower writes to a lender. In these notes, the borrower asks for payments and also mentions the terms related to repayment.

On the slip side, the loan agreements contain detailed information. They include terms and conditions made by the lender involving signatures of both parties and the third person's signature.

Unlike promissory notes, loan agreements being a secured loan contains collaterals. Contrary to a loan agreement, promissory notes can be termed as unsecured as well. So collaterals are not conditioned with unsecured loans. Besides collaterals, loan agreements include insurance factors and assortments of legal terms.

Conclusion

Verbal commitments are not reliable, especially when it is a matter of money. A trustworthy commitment related to money should be documented on paper. A loan agreement contains all information related to individuals involved in the agreement, i.e., lender and borrower.

Furthermore, it makes sure that the lender is not cheated and the borrower is bound to repay amounts according to terms made. Lastly, it is different from a less formal promissory note and should not be mixed with it.