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What are the important parts of a sample loan contract?

Loans are relatively simple commercial transactions although they often occur between family members, personal friends and others. There are a also a large number of loans between individuals, companies and finance organisations such as banks and personal lenders. The variety of types of loans and lending which people engage in are endless although some common ones include to buy a car, start a small business, study at university, pay some bills or to travel. Sometimes people borrow money for doing construction work on their house or to pay for an operation or some medical bills.

There are a number of parts of a loan contract which are fundamental no matter what type of transaction is being entered into. There is the principal amount that is being lent, there is the rate of interest, the use or purpose of the loan, the expected time frame for repayment and the details of any instalment arrangements which are intended by the lender and the borrower. Usually a loan agreement is noted with a date and time that the loan was made and if there are any details of securitisation which are relevant they will need to be included as well.

Things to consider when giving a loan to a friend or family member

If you are thinking about lending money to someone you will need to think carefully about a variety of issues because you cannot always assume that everyone will easily be able to pay you back or in some cases if they will want to pay you back at all. If you come to the conclusion that you want to loan money to someone but you feel that it is not necessarily a given that they will give the money back or repay you with a reasonable rate of interest then you will certainly need to look at codifying the agreement in a form which will give you a better change of enforcing your rights to repayment of the loan at a later stage.

If, for example, you are giving a loan to someone that is unemployed or that doesn’t have the ability or the qualifications to get a job and they have no other known source of income, it is a good idea to reconsider giving the loan at all or have a loan contract in place to protect your interests in the event that the person decided to renig on their repayment obligations. If the person has a history of not paying their debts or of going bankrupt then it would also be a good idea to seriously reconsider the loan. You can also conduct searches on a person to check if they are presently an undischarged bankrupt as the likelihood of repayment in these circumstances is very low. Basically, it is safe to assume that if someone has been delinquent in their debts in the past, they are likely to continue with this pattern in the future.

As you can see, by doing a basic risk analysis of the person that you are thinking of lending money to you can identify some of the major issues that might lead to them failing to repay you. In most circumstances where a personal loan is necessary, you will need to have a loan agreement to ensure that you can protect your rights through the documentation establishing a loan.

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