This article has been written by Pooja Wagh pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

Like any other contract, loan agreements also mention, “offer”, “acceptance to the offer”, and “consideration”. On a daily basis, almost everyone takes a loan, it can be a loan to finance a home purchase, buy a car, or pay for higher education or medical emergencies. If there’s a loan agreement that involves any illegal activity, we cannot enforce the same. A loan agreement is a contract for lending of money from one party to another party with the guarantee to repay the money. If you are a borrower or a lender in the loan agreement who covets to understand how the legalities of the Single Bank Loan Agreement work, this article is for you!

Bank loan agreement

A bank loan agreement is a contract between a lender and a borrower, under which the lender, i.e. a bank makes available loan monies to the borrower. The loan agreement provides the contractual basis under which the loan is made. The borrower agrees to pay the loan sum and abide by the terms of the loan agreement in exchange for the loan. The loan agreement sets out the terms of the loan arrangement including the amount of loan, any conditions to be satisfied prior to draw the loan, interest payment provisions, undertakings of the borrower, warranties and representations and so on. The agreement also sets out applicable security with provisions relating to the term and termination of the agreement upon occurrence of default events.

Types of bank loan agreements

There are two major types of loans, viz., secured and unsecured loans:-

1. Secured Loans: Any loan that has security or collateral against it is a secured loan. This means that if the borrower defaults in payment, the lender has a collateral/ security to indemnify himself. Common examples of collateral are house, car, jewellery, etc. It is the most common type of loan due to the collateral involved. The borrowing limit of the borrower is comparatively higher than that of an unsecured loan.
2. Unsecured Loans: An unsecured loan is where you borrow money without using collateral. Since there is no collateral involved, the borrowing limit of the borrower is low and the level of risk for the lender is high. It results in a low borrowing limit and a high interest rate. If the borrower fails to pay the money back, the lender has very limited options left to recover the money. Most common examples of unsecured loans are credit cards and personal loans. The need for collateral can depend on factors like borrower’s income, borrower’s credit score and the size of the loan. However, personal loans can be both secured and unsecured.

Essential components of an agreement

Any loan agreement, whether by a bank or other financial institutions, consists of the terms, rights and obligations for applying for the loan. However, the components of a loan agreement may require different specifications depending on the different types of loans. To meet local and national standards, it is advisable to check with your local jurisdiction regarding the components of a loan agreement. If we comply with the standards mentioned by our respective jurisdiction, it enables us to seek legal help in case the other party fails to comply with the terms of the loan agreement.

In order to make a loan agreement enforceable, following are the essential components for drafting it:

• Details of the Parties involved (Name, Address, Contact Information);
• Conditions regarding the use of loan money;
• Repayment options;
• Payment schedule;
• Interest rates;
• The term of a loan;
• Any collateral;
• Cancellation policy;
• Provisions for default (if any).

Relevant clauses in a loan agreement

Every loan agreement has a standard clause that makes an agreement valid and enforceable. Below are the drafts of the clauses:

• Conditions and Purpose:

1. Subject to the lender having received and found satisfactory, the borrower shall provide relevant documents and comply with the conditions prior to drawing the loan and the borrower shall be entitled to draw and the lender shall advance the loan in full.
2. The lender will (in consideration of the borrower agreeing to repay the loan on the terms of this agreement) pay an advance up to the amount of INR 5,00,000 in full to the borrower in respect of the borrower’s specified or agreed purpose of vehicle loan.
3. The loan shall not be used for any other purpose by the borrower without the prior written consent of the lender.

• Repayment of Indebtedness:

1. The borrower shall repay the loan together with all indebtedness without deduction or set off on the first to occur of the following:

• An Event of Default; or
• The Repayment Date being the 30th day following a written demand by the Lender to the Borrower requesting repayment of the loan.

2. Should the lender waive the right to repayment on the Repayment Date under clause 2.1 above the loan together with all indebtedness shall be payable upon demand by the lender.

3. If repayment of the loan or indebtedness falls on a day which is not a business day, the due date for such payment will be extended to the next business day.

4. The loan and any indebtedness shall be paid without deduction or set off in Indian Rupee to such account or accounts as may be specified by the lender.

5. The borrower may repay or prepay the loan or the indebtedness (or any part of it) early but may not re-borrow any amount so repaid.

• Interest and Default Interest:

1. The principal amount of the loan outstanding shall carry interest at rate of 6 per cent per annum above the base rate as varied from time to time of bank plc accruing daily and payable in arrears upon repayment of the loan.
2. Interest at the rate of 6 per cent per annum above the base rate of bank plc from time to time shall accrue from the Repayment Date on the loan (to the extent that the loan has not been repaid pursuant to clause 3.1) compounded monthly on the last day of each month and calculated both before and after demand or judgement on a daily basis and a year of 365 days.
3. On the repayment of the loan in accordance with clause 3.1, all accrued interest shall be paid unless otherwise agreed by the parties.
4. Notwithstanding any provision to the contrary, the lender shall be entitled to defer or waive any or all payment of interest on the loan by the company pursuant to this agreement.

• Prepayment and Security:

1. The borrower may prepay the whole or any part of the loan at any time.
2. The repayment of the loan and indebtedness will be secured by way of a fixed and/ or floating charge over the assets of the borrower as specified in the Security Document.
3. The borrower shall at its cost and expense ensure that all documents, registrations, consents, licences and other matters and things reasonably required by the lender in connection with the security afforded to the lender are promptly produced, executed, obtained, filed or made as required by law or by the lender.
4. The repayment of the loan or indebtedness shall be secured by a Guarantee from the Guarantor.

• Representations and Warranties:

The borrower acknowledges, represents and warrants to the lender as follows:

1.  It has power to own its assets and conduct its business as it is now being conducted together with the power to sign and deliver this agreement.
2. The execution on behalf of the borrower of the agreement or form of acceptance endorsed on this agreement has been validly authorised and the obligations expressed as being assumed by the borrower under this agreement constitute valid, legal, binding and enforceable obligations of the borrower enforceable against the borrower in accordance with their terms;
3. It is not aware of any breach of any law, regulation, agreement or arrangement applicable to it or any of its assets; and
4. It will comply and ensure that all its subsidiaries comply with all applicable laws and regulations and the terms of all permits, authorisations and licences (including, amongst all other matters, all laws, regulations, permits, authorisations and licences relating to intellectual property matters).

• Undertakings:

The borrower agrees to be bound by the following undertakings and shall:

1. Not without having given prior written notice of the same to the lender, incur any borrowings or indebtedness nor give any guarantee or indemnity in respect of the borrowings or indebtedness of any other person;
2. Settle the debts incurred by it in the ordinary course of the business, including but not limited to trade creditors;

• Insurance Obligations:

The borrower shall insure and keep insured all assets against such risks as the lender may require for the specified value/ their full reinstatement and replacement value with bank, under such policies as the lender may approve including, but without prejudice to the generality of the foregoing, insurance against loss or damage howsoever caused or arising and third party insurance.

• Events of Default:

1. The lender shall be entitled at any time after the occurrence of an Event of Default by notice in writing to the borrower to declare that the indebtedness has become immediately due and payable and the borrower shall immediately pay the same to the lender.
2. An Event of Default occurs if:

I. the borrower suffers a change of control without the prior written consent of the lender or is the subject of any trade sale, flotation or refinancing;

II. if the borrower issues, allots, buys back or redeems any shares in its capital, makes any changes to its memorandum and articles of association or alters any rights attaching to the issued shares without the prior notification or approval in writing of the lender;

III. any event occurs with which the giving of notice and/or lapse of time and/or making of a determination would constitute an Event of Default;

IV. The borrower fails to make any payment due under this agreement on the due date.

• Fees and Expenses:

The borrower shall pay to the lender the following:

1. On-demand, on a full indemnity basis, all costs, fees and expenses, including legal fees and expenses and in each case relevant tax thereon, relating to the preparation, negotiation and execution of this agreement and the Security Document;
2. All costs, fees and expenses, including but not limited to legal fees and VAT thereon, incurred by the lender in connection with preserving or enforcing or attempting to preserve or enforce any of the lender’s rights under this agreement and the Security Document.

• Currency and Payments:

1. All payments to be made under this agreement shall be in Indian Rupees (INR), in immediately available funds during normal banking hours to such bank accounts as the lender shall specify.
2. If any such sum falls due for payment under this agreement on a day which is not a business day, it shall be made on the next succeeding business day.

• Assignment: 

1. The borrower may not assign, charge, mortgage, transfer or otherwise encumber or deal in any manner with any of its rights or obligations under this agreement without prior written consent of the lender.
2. The lender may assign or transfer any of its rights or obligations (in whole or part) under this Agreement with the prior written consent of the borrower.

• Miscellaneous:

1. Any decision made or opinion held by the lender concerning the provisions of this agreement shall be made in its absolute discretion and shall be final in the absence of manifest error and binding on the borrower.
2. No failure or delay by the lender in exercising any right, power or privilege under this agreement shall impair the same or operate as a waiver of the same nor shall any single or partial exercise of any right, power or privilege preclude any further exercise of the same or the exercise of any other right, power or privilege. No waiver, compromise agreement or other dealing with one person jointly and severally liable shall affect or reduce the liability of any other such person.
3. The rights and remedies provided in this agreement are cumulative and not exclusive of any rights or remedies provided by law.
4. This agreement may be amended or modified in whole or in part at any time during the period of the loan agreement by an agreement in writing executed in the same manner and by the same persons as this agreement.

• Governing Law:

This agreement and the contract arising out of the borrower’s acceptance of the loan facility on the terms and conditions set out in this agreement shall be governed by and construed in all respects in accordance with the laws of India. The parties submit to the exclusive jurisdiction of the High Court of Bombay.

Conclusion

The money borrowed with a promise of returning it within a specific period of time is known as loan. The loan agreement becomes useful in case a borrower does not return the money to the lender within the stipulated time. An agreement is enforceable in the court of law when it is signed and agreed by both parties. The terms and conditions of the loan agreement should be carefully analysed before signing as it helps us avoid future legal trouble and confusion.

References

1. https://lawrato.com/legal-documents/banking-finance-legal-forms/loan-agreement-2
2. https://www.debt.org/credit/loans/contracts/
3. https://www.legalnature.com/guides/everything-you-need-to-know-about-loan-agreements.

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