These days, it's becoming commonplace for people to borrow loans when necessities arise. It is fast becoming a ubiquitous practice to borrow a personal loan to fulfill a variety of needs and to meet a diverse set of milestones such as purchasing a new car, financing a house purchase, covering education costs, or paying emergency medical bills. However, before one can apply for a personal loan, it is crucial that they understand the agreements, terms, and conditions that apply to the loan in question.
Personal loan agreements are binding contracts, through which a loan process is finalized between two or more parties such as a bank/financial institution and a loan applicant. There are several different types of loan agreements. These agreements may range from simple promissory notes to other long detailed contracts.
Every loan agreement and its terms and conditions are normally overseen and governed by the Indian government and its guidelines. This specifically helps in preventing banks and financial institutions from levying predatory interest rates on consumers.
Generally, loan agreement forms include:
The interest rate levied
Duration within which the loan has to be repaid completely
Terms of default
Collection terms in the case of default of a loan
The chief purpose of a loan agreement is to legalize and define what the involved parties are agreeing to. Moreover, it specifies the responsibilities of each involved party and the tenure of the loan agreement. Let’s have a closer look at the other purposes of signing a loan agreement form.
It specifies that the personal loan taken is in compliance with the government and federal regulations. This helps protect both, the borrower and the financial institution in case of non-compliance.
A signed loan agreement specifies the purpose for which the loan will be used, how it will be repaid, and its amortization rate.
Personal loan agreements also specify the other fees levied while applying for a loan. These charges include default penalties, application and processing charges, and repayment plans, among others.
Most importantly, a loan agreement is also proof that the funds are a loan and not a gift.
In case disagreements over a loan are taken to court, a loan agreement helps the court decide which party is in the right, and which is in the wrong.
Having a loan agreement also helps in determining the exact overdue amount of a loan account, if any. Hence it can be deduced that before taking a personal loan, a loan agreement is a must.
To define the legal obligations of both the involved parties, it is necessary that personal loan agreements have a section that defines and simplifies the standard legal terms for the understanding of a layman. Before signing a personal loan agreement, here are a few terms that you must know.
Outstanding Dues: The term ‘outstanding dues’ refers to any sums of money currently outstanding and payable to the loan provider. Simply put, the term refers to any amount that is owed to the lender by the borrower. This can include the principal amount, applicable interest, and any other fees and charges.
Due Date: A due date is a date by which the borrower is required to furnish any sums payable to the lender. A due date could refer to the deadline for paying EMIs, interest amounts, or any other charges or costs.
Bounce Charges: If a post-dated check provided by the borrower to the lender bounces, bounce charges at the applicable rate could be levied. Thus, bounce charges are nothing more than the charges the borrower may incur if any dues payable are not honoured by their bank.
Penal Interest: If the borrower fails to pay their EMIs or outstanding dues by the stipulated due date, they are liable to pay penal interest.
Ensure you familiarise yourself with this legalese and scour your loan agreement thoroughly to understand the terms and conditions applicable in this respect.
The terms and conditions of a loan agreement will revolve around the following points:
Fees and Charges: These terms would deal with the applicable fees and charges levied by your loan provider. They can include processing fees, convenience charges, annual maintenance charges, bounce charges, and penal interest. Ensure that you understand all applicable fees and charges thoroughly before undertaking a loan.
Interest: The terms and conditions here would pertain to the rate of interest charged by the loan provider. As per the stipulated due date, you would be required to furnish the interest payable.
Repayment: This would stipulate the terms and conditions concerning the repayment of your personal loan. The EMI (Equated Monthly Installments) due every month is calculated by taking into account your interest rate, the repayment tenure and your loan amount.
Default: If the borrower fails to pay the amount due on the relevant due dates, they would be defaulting on their payments. In such cases, the loan provider would generally follow-up by way of text or call and, at certain times, may levy a penalty.
Foreclosure: When an individual is able to repay all their dues earlier than warranted, this is known as the foreclosure of a personal loan account. While certain loan providers would levy charges on foreclosure, others opt not to do so. For instance, the personal loan available on online platforms like Bajaj Markets come with zero foreclosure charges.
When a borrower defaults on any payment or does not follow the stipulated terms of the contract, it is considered to be a breach of the agreement. If any losses are suffered by fault of the borrower, they are liable to compensate the lender for any legal charges. The lender, if subject to default on the loan, may also pursue litigation against the borrower. Further, this could have a negative impact on the credit report of the borrower.