Prerequisites for Making a Loan Agreement

2 min read
19 January 2023

Loan agreements are legal contracts that bind two or more parties and formalize the loan application process. There are many different kinds of loan agreements, from straightforward promissory notes between friends and family to more intricate contracts like mortgages, auto loans, credit card agreements, and short- or long-term payday advance loans.

A loan contract's primary function is to lay out the terms of the parties' agreement, their respective obligations, and the duration of the contract. State and federal laws should be followed when drafting a loan agreement in order to protect both the lender and the borrower in the event that either party fails to uphold their end of the bargain. Depending on the type of loan, different conditions will apply, as well as which state or federal laws will apply to the performance requirements required of both parties.

What Should Be in a Loan Agreement?

All loan agreements shall contain general provisions defining the respective legal obligations of the parties. For instance, it is necessary to clearly state the terms pertaining to the repayment schedule, default or contract violation, interest rate, loan security, and the offered collateral. Before you sign a loan agreement, make sure you are familiar with the following four terms:

Choice of Law

This phrase describes the variance in laws between two or more jurisdictions. For instance, a particular provision of a loan agreement may be governed by laws in one state that are different from the same provision in another state. Which state's (or jurisdiction's) laws will be in force needs to be specified. Loan legal documents online can be found easily.

Involved Parties

The term "Involved Parties" refers to specific details about the lender and borrower that should be made clear in the loan agreement. Names, addresses, phone numbers, social security numbers, and contact information for each party should be included in that information.

Severability Clause

This clause declares that a contract's terms do not depend on one another. As a result, just because a court finds one clause of a contract to be unenforceable does not mean the rest of them are as well.

Entire Agreement Clause

This clause, which states what the entire agreement will be, supersedes all prior understandings reached during negotiations, whether they were made in writing or verbally.

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carlglendon 2
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