A personal loan contract can be created between a debtor and a creditor. It should follow a few guidelines. A contract should be looked at by an attorney who can check it for errors and verify all laws are being followed. A loan agreement is a contract between a lender and a borrower. It regulates the mutual promises made by each party to each other. There are a number of types of agreements, such as, working capital loans, term loans, revolving loans, and facilities agreements. Before entering into an agreement the borrower has to show credit worthiness. Collateral may have to be evaluated. His or her character, as well as, cash flow will be looked at.
Loan agreements in Illinois are just like any other contract. There is an offer, an acceptance of the offer, consideration, and the terms must be legal. Loan agreements are usually written. There can be various documents around the loan, such as commitment letters, letters describing the loan and its terms, and the promissory note itself. A verbal agreement can be made, but those are harder to enforce.
Loan agreements with commercial banks or large finance companies are often categorized as personal loans or commercial loans. Commercial loans are further subdivided into industrial or commercial real estate loans. Loan agreements can be generated by savings banks, commercial banks, insurance organizations, finance companies, and investment banks. Each of these institutions are different from each other and serve a different purpose. A commercial bank and a savings bank incorporate “public trust.” They accept deposits and generate loans. Insurance organizations have created their own loan agreements. They collect premiums for property/casualty or life coverage. An investment bank creates loan agreements for the needs of investors that they are trying to attract.
There are a few types of loans such as bilateral loans and syndicated loans. If a loan is categorized by the type of facility, then there are term loans and revolving loans. All of these loans are generally written contracts. A written loan contract should include the following:
- A loan contract should include the names of both the creditor and the debtor.
- It should include the principle of the loan. This should be written in numeric form.
- The interest rate in percentage per year earned on the loan should be included.
- The terms of the loan are necessary. Common terms for a loan are 12 months, 1 year, 3 years, 5 years, or 10 years.
- Include what the loan is for. This could be repaying credit card debt, financing a new vehicle, making repairs to property, etc.
- There should be a prepayment clause that will indicate if there is a penalty for prepaying the loan. This should be written as a percentage or monetary value.
- Both parties need to sign the loan agreement in front of a notary.
- Using a loan template can speed the process and makes sure nothing is left out.
Loan templates and forms can be downloaded. A good contract should be looked at by an attorney to make sure everything is legal and nothing is missed. A verbal agreement should never be used even though it is legal. A written loan contract is much easier to enforce so it is preferred.