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A Breakdown of Loan Agreement Terms

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A Loan Agreement is that legal written instrument which covers the expectations of the Lender as agreed to by the Borrower. While the definition is simple, the document itself is not. However, an understanding of the basic terms used in a Loan Agreement is paramount prior to signing the document.

There is no standard model for loans, every term in the agreement is negotiable. The following are key points in a loan agreement that will affect the borrower:

Due date:This is the date on which the installment is to be paid each month. At the end of the term of the loan, this date can also be defined as a lump sum payment or a periodic payment of principal with a final payment. For example, you can agree to borrow $100,000 with the entire principal due in two years. Or, you can repay the principal in 20 equal monthly installments of $5,000. In any event, be sure that your payment schedule (interest and principal) coincides with your anticipated cash flow.

The loan payment dates should be clearly set forth (the most common method requires monthly payments by the first day of each month). If your cash flow situation is such that a great deal of cash comes in after the first day of the month, then adjust the timing of the required loan payments.

Interest payments: The interest rate (APR) is established by the lender in compliance with the applicable state usury laws that decide how much interest can be charged on a loan.

Loan fees: Be careful on the amount that the lender may charge as an up-front loan or processing fee. Try to get an estimate as soon as possible so you can evaluate how attractive the loan is as a package.

Prepayment: Make sure that your loan agreement gives you the flexibility to pay off your loan at any time. Try to avoid a prepayment penalty for paying off the loan early.

Defaults: A lender is likely to suggest a variety of events that can cause a default on your loan, including bankruptcy, failure to make payment on time, and breaches of any obligations in the loan documents. Negotiate advance written notice of any alleged default to give yourself a reasonable amount of time to fix the problem.

Grace period: Negotiate a grace period for any payments. For example, a monthly payment may come due on the second day of the month but is not deemed late until the fifth day of the month.

Late charge: Ensure that any fees for late payments are reasonable.

Collateral: As security to protect the loan, the lender may insist on a pledge or mortgage of some asset. If you default on the loan, the lender is able to foreclose upon the asset (under a mortgage for real property or Security Agreement for personal property) and sell it to repay the money it is owed. Limit the amount you have to give to secure the loan, if you are required to provide security. Be sure that when the loan is repaid, your lender is required to release its mortgage or security interest and make any governmental filings to acknowledge this release.

Co-signors and guarantors: As a way to further insure that the loan will be repaid, a lender may ask for a co-signer or guarantor. A co-signer or guarantor runs the risk that his or her personal assets will also be liable for the repayment of the loan.

Attorneys' fees: The lender may insist on a clause saying that you will have to reimburse the lender's fees and costs in enforcing or collecting on the loan should you fail to make payments. Be sure to Insert a qualifier that the reimbursement only covers "reasonable" attorneys' fees.

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