What is a loan agreement?


Quick Answer

A loan agreement is a document that binds a borrower to a lender, whereby the borrower accepts to pay back the money in compliance with stated terms. The document is a compilation of various promises made by the involved parties. The agreement usually protects the lender, as it is a legal document that expects the borrower to adhere to the terms and conditions.

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Full Answer

A loan agreement is also important to a borrower because it highlights the details of the loan and also lets them keep a record of their payments. Before entering into the agreement, the borrower must provide the lender all the required information necessary for determining a person's credit worthiness. If the borrower fails to adhere to the terms, the lender can impose additional fees. An agreement can be used in several situations, including business loans, purchases, student loans, personal loans and real estate loans.

The details that must be in the loan agreement include the amount being lent, collateral, late fees, loan sales, any cosigners and repayment plan and options. The lender may choose to charge interest on the amount borrowed or to increase the interest rate if the borrower fails to settle the payments on time.

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