Personal Loan Contract and Financial Relationships

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What is a loan contract?

A loan contract is a contract entered into between which regulates the terms of a loan. Loan agreements usually relate to loans of cash, but market specific contracts are also used to regulate securities lending. Loan agreements are usually in written form, but there is no legal reason why a loan agreement cannot be a purely oral contract (although in some countries this may be limited by the Statute of frauds or equivalent legislation).

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Steps to Writing a Loan Contract:

Here are some simple steps to follow when writing a loan contract:

1 Write the names of the people who are entering into the contract. Identify each person/party as the creditor or debtor in the loan agreement.

2 Write the principle. Write the amount of money borrowed in numeric form. For example, “Jane Smith agrees to a loan of $5,000.”

3 Write the interest rate. Write the percent paid or earned for each year of the loan. For example, “Jane Smith agrees to a $5,000 loan with an interest rate of 1 percent.”

4 Write the terms of the loan. Write how many years the debtor has to repay the loan. Common loan terms are 12 months, 1 year, 3 years, 5 years or 10 years.

5 Write the use of the loan. Write how the loan will be used. Common loan uses include paying for medical expenses, repaying credit card debt, financing a new vehicle or performing renovations on a property. Be as specific as possible.

6 Write a prepay clause indicating if a prepay penalty will be imposed. Write the prepay penalty as a monetary or percentage value.

7 Have the contract notarized and provide copies to the debtor. Both the creditor and the debtor must sign and date the contract.

8 Use a loan contract template.

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