A loan agreement is a legally binding contract entered into between two parties that outlines the terms and conditions of the loan. The loan agreement template can be used for a loan to a business by another business or individual, or it may be used for a loan to an individual by another individual. This loan agreement relates to the loan of cash and is unsecured.
Interest is charged on the loan, with the interest being calculated at a monthly rate of one twelfth of a nominated annual rate above the published annual base rate from time to time of the Bank of England.
Repayment of the loan and interest is on a monthly basis. The agreement contains provisions allowing for the increase or decrease in monthly payments in accordance with the increase or decrease in the published annual base rate. The agreement allows the borrower to repay the loan and interest within a specified time but the borrower may repay the loan and interest at any time by giving notice in writing to the lender or by paying a specified number of months interest in lieu of notice.
Different Types of Financial Loans
Whether you need to borrow money to pay bills, finance home improvements or get through college or university, a loan could help make it happen. To make lending money easier, most lenders use a loan agreement. Although there is no legal requirement for the loan agreement to be in writing (there is no reason why the agreement cannot be oral) it makes business sense to have a written agreement recording details of the loan.
Loan agreements fall into two categories:
- Term loans - which have a specified repayment schedule and are repaid in set instalments over the term. For example, many small businesses use term loans to provide the cash they need to operate from month to month. Often a small business will use the cash from a term loan to purchase fixed assets such as equipment used in its production process.
- Revolving loans – which allow for the loan amount to be withdrawn, repaid, and redrawn again in any manner and any number of times, until the arrangement expires. They do not have a fixed number of payments and interest is paid from month to month on the drawn amount. Credit card loans and overdraft loans are revolving loans. This type of loan is considered a flexible financing tool due to its repayment and re-borrowing flexibility. It is not considered a term loan because, during this allotted period of time, the borrower can repay or take the loan out again. It is also different from a fixed monthly payment loan because a revolving loan lets borrowers use as much of the credit as is available and only pay interest on what they have used.
Within these two categories there are subcategories of secured loans and unsecured loans, and rates of interest which may be fixed or floating.
Secured and Unsecured loans
A secured loan is one which is backed by assets belonging to the borrower in order to decrease the risk assumed by the lender. The assets pledged by the borrower act as collateral for the loan and may be forfeited to the lender if the borrower fails to make the necessary payments. Secured loans nearly always have a lower rate of interest compared to unsecured loans.
An unsecured loan (sometimes referred to as a 'personal loan') allows the borrower to borrow money without having to provide security against it, such as their home or car. Due to the increased risk involved, interest rates for unsecured loans tend to be higher. Typically, the balance of the loan is distributed evenly across a fixed number of payments and penalties may be applied if the loan is paid off early. Unsecured loans are often more expensive and less flexible than secured loans, but suitable if the lender wants a short-term loan.
Within the unsecured loan subcategory you can also have a loan agreement with guarantee, where a third party (the 'guarantor') guarantees payment of the loan to the lender for instances where you want a little more security on an unsecured loan.
Fixed Sum Loan Agreement
A loan with a fixed interest rate is one where the interest rate doesn't change during the period of the loan. Fixed rate loan payments do not change as the interest rate changes and the payment amounts will always be the same regardless of the financial climate. This allows borrowers to accurately predict their future payments. There may be a substantial charge to pay if you choose to repay a fixed rate loan before the end of the agreed term and it is advisable to seek legal advice before entering into such an agreement.
A loan with a floating interest rate, also known as a variable rate or adjustable rate, refers to any type of loan which does not have a fixed rate of interest over the life of the debt. Typically, floating rate loans will cost less than fixed rate loans; in return for paying a lower loan rate, the borrower takes the risk that rates will go up in future.
This loan agreement template is suitable for use in the UK - England, Scotland and Wales. includes relevant clauses and allows inclusion of details:
- amount of loan
- period of loan
- interest rate (relative to a nominated base rate)
- monthly repayments.