Basic elements of loan agreements

Basic elements of loan agreements

Posted by on Jan 26, 2016 in Cash & Loans, Mortgages Loans, Payday

Basic elements of loan agreements

When it comes to loan agreements, there is no standard form of the agreement which can meet all the circumstances of a particular lending. However, there are certain elements which must be contained in every loan agreement, in order to serve as protection against all eventualities. In this article, we will deal with the basic elements of a loan agreement, which every agreement of this type should contain in order to be fully valid and protective for both the borrower and the lender.


1. Conditions of the loan – the loan agreement should spell out the conditions of making the loan. They include the purpose of the loan, the currency or currencies in which the loan is made, the dates between which the money can be drawn and the minimum and maximum amount of each withdrawal.

2. Remuneration of the lender – the loan agreement must specify the monthly rollover basis of all the fees, the dates when they are due to be paid, the basis for calculating the interest and the commitment fees, as well as the amount and dates of payment of other fees, if there are any.

3. Repayments and prepayments – this element of the loan contract should specify the number of repayment installments and the dates when they are due, as well as conditions under which prepayments (early repayments) are allowed.

4. Renewal of loan – the borrower is usually required to select interest period and currency, if applicable before each withdrawal or rollover date.

5. Taxation – loan agreements should specify that all amounts payable by the borrower will be made free and clear of all taxes and similar charges. 6. Conditions precedent – before the lender allows any withdrawals under a loan, it is necessary that they are convinced that the borrower has the power and authority to enter into a loan agreement. They also need to make sure that the contract is binding on him, that the information given by the borrower is correct and that the borrower is not currently in breach of any of the covenants he will undertake to maintain the life of the loan.

7. Alternative interest rates – the protections must be included against the unlikely event that the interest rate is impossible to be determined on the basis of the average interest rate offered by federal funds rate.
8. Changes in applicable law – there is always a possibility of changes in the law during the life of a long-term loan, which can have as a consequence the change in bank’s ability to continue the loan. This is why a loan agreement should prescribe the clause stating how to deal with a situation such as this.

9. Representations and warranties – it is important that the lender makes a full and truthful disclosure of all the factors relevant to a landing decision and makes representations and warranties to that effect.

10. Events of default – in case any signal of danger for the loan appears, this clause of the loan contract determines the procedures which should be followed in such cases. This clause makes the loan repayable immediately if any unexpected event occurs, and the details of this clause vary according to circumstances.

11. Governing law – a provision should be stated so that if an instalment is paid in a currency other than the currency of the loan, the borrower will compensate the lender for any of the exchange loss.

12. Jurisdiction – it is usual for the borrower to expressly submit in the loan agreement to the non-exclusive jurisdiction of the New York courts.

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