Loan Agreement FAQ - United Kingdom

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A Loan Agreement is used to document and set out the terms of a loan between individuals, between corporations, or between an individual and a corporation.

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Contents

Definitions

Who is the Borrower?

The Borrower is the person or corporation that receives value (money, property or some service) from the Lender on the condition that the Borrower will pay the principal amount plus any interest to the Lender at sometime in the future.

Who is the Lender?

The Lender is the person or corporation that gives something of value (money, property or some service) to the Borrower on condition that the Lender will be paid a certain amount in the future.

What is the governing law for a Loan Agreement?

The governing law is the law of the jurisdiction in which the Loan Agreement will be entered into. Often the parties select the jurisdiction where the Lender resides. If the Loan Agreement relates to the purchase of certain assets, then the location of those assets is selected.

What is the Principal amount?

The principal is the original amount of the loan that is owed by the Borrower to the Lender on the date the Loan Agreement is signed. Once the Borrower has begun to pay back the loan, the principal refers to the amount of money still owing to the Lender at any given moment in time.

What is interest?

Interest is an amount charged to a Borrower for the use of the Lender's money. It is usually expressed as a percentage of the amount borrowed and is calculated at a specified interval over the course of the term of the Loan Agreement. The interest rate is the annual interest rate.

What does compounded mean?

Compounded refers to how frequently the interest is calculated and added to the principal amount of the loan to arrive at a new balance. The more frequently the interest is calculated, the more interest the Borrower will end up paying to the Lender.

What is a demand loan agreement?

The balance owing in a loan agreement does not need to be repaid until the Lender demands to be repaid. In other words, the loan is repayable 'on demand'. There is no fixed end date for the repayment of the loan. Upon demand, the Borrower is given a certain period of time to repay the outstanding balance of the loan agreement.

What is the Term?

The Term is the time length of the loan agreement. At the end of the term, the Borrower must repay the outstanding balance of the loan.


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Loan Agreement Details

I am a shareholder. Should I use the Loan Agreement or the Shareholder Loan Agreement?

As a shareholder, if you are lending money to the corporation, use our Shareholder Loan Agreement. If you are borrowing money from the corporation, use our Loan Agreement. Use our promissory note if you prefer a more basic and simpler document than the Loan Agreement.

Do I have to charge the Borrower interest?

No, the Lender can choose whether or not to charge interest. If the Lender decides to charge interest, they can pick how much interest to charge. However, there may be tax consequences to the Lender or Borrower if interest is charged but it is not a reasonable rate.

What are the payment options available?

There are four options for the method of repayment.

  1. Specific periodic amounts - the Borrower will make a certain payment to the Lender on regular intervals.
  2. Lump sum payment at the end of the term - the Borrower pays nothing to the Lender until the end of the note term, at which time the Borrower repays the entire note in one payment.
  3. Interest only - the Borrower makes regular payments to the Lender that are put toward paying off the interest on the principal amount only, with no portion of the payment going towards the principal amount itself.
  4. Interest and principal - the Borrower makes regular payments to the Lender that are put toward paying off both the principal amount and the interest as it is compounded. At the end of the term of the Loan Agreement, there will be no outstanding balance to be repaid.

Should the Lender require the Borrower to provide security/collateral for the note?

If you do not take collateral, and the Borrower defaults on the loan, you will have to take the Borrower to court in order to recover your money and your judgment can only be enforced against certain assets of the Borrower. However, if you take collateral for the loan agreement, then you may be entitled to seize and sell the collateral if the Borrower fails to repay the loan.

Does the collateral need to be equivalent in value to the amount of the loan?

No, if collateral is given for the loan, it can be for any amount. If the Borrower fails to repay the note, and the collateral is worth less than the note, then the Lender can seize the collateral and sue the Borrower for the remaining amount of the loan. If the Lender recovers more than the outstanding balance from the sale of the collateral, any surplus amount would be returned to the Borrower or his other debtors depending upon the situation.


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Consumer Credit Act

Will this loan agreement be governed by the Consumer Credit Act?

Under certain circumstances, your loan agreement may be governed by the Consumer Credit Act 1974 as amended by the 2006 Act. The Consumer Credit Act will not affect your loan if:

  • Your loan is a non-commercial agreement
  • Your loan was created for a business purpose and the loan is greater than £25,000.00
  • Your loan is for £30.00 or less.

What is a non-commercial agreement?

Section 189 of the Consumer Credit Act 1974 defines a non-commercial agreement as “a consumer credit agreement or a consumer hire agreement not made by the creditor or owner in the course of a business carried on by him.” In other words if the Lender provides loans as part of the Lender’s course of business, the Lender’s loan will likely be considered a commercial agreement and the Consumer Credit Act will apply.

Are there any additional requirements that may apply if my loan is governed by the consumer credit legislation?

If your loan is governed by the Consumer Credit Acts, you will need to make sure that your loan complies with those acts and their regulations. This may include providing certain notices and other information as well as providing the APR (Annual Percentage Rate). You should consult the consumer credit legislation for more information.

Where can I find out more about consumer credit legislation?

You can find out more about consumer credit legislation by clicking the links below:


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Loan agreements and seller/vendor financing

How does Seller Financing work?

Seller Financing is a loan from a seller to a purchaser where the purchaser does not have the cash to cover some or all of the purchase price of the asset. With Seller Financing, the asset title is transferred to the purchaser who then takes a loan from the seller and grants the seller a security interest in the purchased asset. In the case of a motor vehicle, transferring title of the asset to the purchaser allows the purchaser to acquire insurance and registration. The sole purpose of the loan is to facilitate the purchase of that particular asset. The asset itself is used by the purchaser as collateral for the loan. This means that the Seller could make a claim against the asset if the purchaser should default on one or more loan payments. Also, with Seller Financing, the purchase and sale agreement should contain as much detail as possible regarding the financing particulars including the amount to be financed, the term, the rate of interest and frequency of compounding, the monthly payments, the amortization period as well as any penalties for non-payment.

Signing Details

I do not know when the Loan Agreement will be signed. Can I fill in the date later?

Yes, by selecting 'Unsure' as the date the agreement will be signed, a blank line will be inserted into the contract so that you can add the correct date after printing the document.

Do I need witnesses to sign the Loan Agreement?

Generally speaking, there is no requirement for a witness or notary public to witness the signing of the Loan Agreement. However, depending on the nature of the loan and the governing law of the jurisdiction in which you're entering into the loan, you may be required to have witnesses or a notary public witness the Loan Agreement. Even if it is not required, having an objective third party witness the signing of the loan agreement will be better evidence when you need to enforce the repayment of the loan. Signing the note in front of a notary public is the best evidence that the Borrower signed the loan agreement.


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