June 25, 2021
June 25, 2021
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4.5 - 1 vote
If you are planning to lend money and want to secure your money from being lost forever this guide is for you. Whether you are lending money to a friend or family member or are lending money on commercial terms to someone you do not know, it is important to consider the borrower's repayment capacity and have in place a well-drafted loan agreement. Many of you may have regretted lending money and losing it for not having a proper written agreement to substantiate the claim.
A loan agreement is a contract between the lender and borrower that regulates the mutual commitments made by each party. Loan agreements are beneficial for both the borrowers and lenders for many reasons. Namely, this legally binding agreement protects both of their interest if one party fails to honour the agreement.
You can prefer a document with simple terms and conditions such as a promissory note as an acknowledgement to pay back the debt on-demand or on other terms. If the aim is to include specific or detailed clauses and the amount involved is huge, it is advisable to enter into a loan agreement. Both the promissory note and loan agreement are legally valid documents and are accepted by courts in case if there is a dispute. In case, if you do not have a written loan agreement with valid stamp duty, it is difficult to contest the case in a court of law and there is a higher chance of losing the same.
You can secure your loan by incorporating the following safety measures:
You can always prefer to have a guarantor to the loan. A guarantor is a person who takes the responsibility to repay the loan on behalf of the borrower if the borrower fails to repay the loan. A guarantor is also known as a 'surety'. This methodology can be used even if you are lending money to a person or entity. When you prepare the loan agreement, you can add the details of the guarantor and get them to sign the loan agreement. In case if the borrower fails to pay the amount, you can claim the amount from the Guarantor and even file a suit against the guarantor to recover the money.
The lender can also consider the option of having security or collateral on the money lent. Security is an item of valuable property that the lender can recover from the borrower if the borrower fails to make the payment on time. Security can be of a car, gold, house, land, etc. of value equivalent to or more than the value of the loan. In case, if the borrower fails to make the payment, the lender will be at the liberty to sell the security assets and recover the loan amount. Once the loan amount is completely paid by the borrower, any collaterals or documents will be returned to the borrower.
A post-dated cheque is a form of a cheque drawn with a future date written on it. Thus, securing a post-dated cheque from the borrower will help the lender to recover money in the case of default in payments. The PDC's along with a loan agreement will help the lender to substantiate the existence of the loan and recover the money by submitting the cheques at the bank. If the PDC's was not issued at the time of entering into a loan agreement, you can send a cheque deposit letter to the borrower. In case, if the cheque bounces (returned by the bank for the inefficiency of the fund in the account of the borrower or other reasons), the lender can initiate criminal proceedings against the borrower in the competent court of law. Thus, collecting PDC's at the time of lending money and adding the details of PDC's in the loan agreement will help the lender to recover the money with ease.
Apart from the above, a loan agreement includes the following important clauses:
It is important to mention the amount of money lent and the method used to make the payment. The currency in which the loan will be provided and the repayment made will be mentioned under the loan agreement. It is better to use the cheques or transfer money through a bank to have a record of lending the money. You can also mention the purpose for which the loan was lent and the limitations for its applications. Thus, by putting conditions on the usability of the loan amount, you can ensure that the amount lent is not misused or used for a purpose other than the one mentioned under the loan agreement.
You can specify whether the borrower has to pay any interest on the loan amount, the interest rate at which the amount is lent, how it is calculated (simple interest or compound interest), and so on under the loan agreement. The loan agreement can also be prepared without interest. If the interest and its calculations are not mentioned properly, it may lead to disputes between the parties.
It is always important to clearly specify the term of loan, repayment schedules, repayment amount, how it will be adjusted against the loan and interest amount in the loan agreement, how the borrower will make the payment etc. The loan agreement can be drafted without any terms or repayment schedule as well. Thus, in the case of a friendly personal loan, you may allow a flexible loan repayment to the other party. These details shall be included under a loan agreement to avoid any disputes in future. In case, if the borrower want to repay the full loan amount before the due date, any conditions including pre-payment charges if any can be mentioned under the loan agreement.
The obligations of the borrower concerning the loan including insurance on the loan amount, an inspection of documents and collaterals, protection of the collaterals, etc. can be mentioned under the loan agreement. The borrower will also be required to use the loan for the purpose mentioned under the loan agreement. Incorporating specific obligations of the borrower will help both parties to have clarifications and to avoid any disputes.
The obligation of the lender such as giving proper receipts for the down payments, securing the documents or properties submitted as collateral, returning the collaterals at the time of closure of loan amount, etc. can be mentioned under this agreement.
Another major clause under a loan agreement is the provision regarding the remedies in case the borrower makes any default in payment. This includes selling the collaterals, issuing additional PDC's, increased interest rate, penalty, etc. You can also specify the penalty for making default in payment in addition to the accrued interest. The dispute settlement mechanism including arbitration, mediation, etc. along with the court under which the disputes will be settled can be mentioned under the loan agreement.
Thus, if you are a lender, it is always better to have a written loan agreement citing the aforementioned important methodologies and clauses. Having a well-drafted loan agreement will help you in securing your loan amount. In case, if you do not have a written loan agreement with valid stamp duty paid, it is difficult to contest the case in a court of law and there is a higher chance of losing the same. Thus, it is always better to get the loan agreement printed proper stamp paper of the concerned state and get it notorized. In case if the borrower fails to make the payment on time, you can send a letter demanding the payment of a debt before initiating the legal proceedings. Once you draft the loan agreement, always keep a copy with you for future reference. In case, If you want to amend a loan agreement for any reasons, you can enter into an amendment agreement with the borrower.