An essential guide to loan agreements
An essential guide to loan agreements
Thinking about borrowing money? Entering into a loan agreement with a lender is something you should take time to fully understand. It’s important to be aware of your obligations and rights when entering into any contractual agreement, whether it’s for a secured or unsecured loan.
If you’re not sure exactly what you’re committing to, find out more in our essential guide to loan agreements. We’ll cover what they are, why they’re important, what should be included and more.
What is a loan agreement?
A loan agreement is the contract created between you and a lender when you take out an unsecured loan. It sets out the terms and conditions, formally documenting the obligations and rights of both parties. The lender usually creates the contract.
All key elements of a loan agreement should be included, such as the amount of money loaned, the interest rate charged, the repayment schedule and the total amount repayable. More on this later.
For a secured loan linked to a mortgage, also known as a second-charge mortgage, the contractual process is usually different. You’ll be issued with a mortgage illustration first, followed by a binding mortgage offer. To accept the loan, you’ll then have to sign the legal charge.
Why is a loan agreement important?
Loan agreements are a fundamental feature of the unsecured lending process, just as mortgage illustrations, binding offers and legal charges are for secured loans. Formal contracts between you and a lender provide clarity and transparency, ensuring legal protection and laying out the conditions both parties must adhere to.
Some people assume these contracts only benefit the lender but that’s not accurate. Despite usually being created by the lender, loan agreements of all kinds provide legal protection for you, the borrower, if the lender fails to fulfil their obligations and vice versa.
Borrowing or lending money without formal loan agreements can be incredibly risky. Having a contract in place is best to ensure a clear and transparent process from start to finish.
Are loan agreements legally binding?
Once both you and a lender have signed and dated a loan agreement or legal charge, it’s legally binding until the terms of the contract have been met or both parties agree to terminate it.
This means that, if either party fails to fulfil their agreed obligations – such as keeping up with repayments or providing the full loan amount – the contract can be used as evidence in court in an attempt to enforce the terms.
As with any legally binding contract, it’s best to fully review and understand the terms and conditions of a loan agreement or second-charge mortgage before providing your signature.
What should be included in an unsecured loan agreement?
Loan agreements must clearly state the terms and conditions agreed to by both parties. For unsecured loans, this usually includes:
- Details of lender and borrower (up-to-date names, addresses and contact details etc.)
- The amount of money loaned
- The interest rate charged (usually a percentage of the amount borrowed) and whether it’s a fixed or variable rate
- The overall loan term (the period over which the money is to be repaid)
- The repayment schedule (how much money is to be repaid, when and by what method)
- Any incurred fees or potential charges (such as processing fees or late payment penalties)
- Signatures and dates of signing from both parties
Any contract created is likely to have conditions unique to your arrangement, so it’s always worth reviewing it to ensure you’re satisfied with the terms before signing.
What steps are included in a secured loan agreement?
While there isn’t a simple loan agreement for a secured loan or second-charge mortgage, there are various documents and legally binding contracts included in the process. Our process here at Evolution Money follows these steps:
- You’ll be issued with a mortgage illustration that outlines the details of your second-charge mortgage.
- Next, you’ll receive a binding mortgage offer, complete with Terms & Conditions once the application has been fully underwritten.
- You’ll then have to sign a document called the ‘legal charge’ if you want to accept the loan and receive your funds.
For more information on the various financial terms associated with secured loans, check out our Jargon Buster page.
What are the different types of loan agreements?
Many forms of borrowing can be considered a loan agreement. Wherever there is money being loaned from one party to another, even between family and friends, a formal contract in place can provide clarity, transparency and legal protection. The most common types of loan include:
- Mortgages
- Credit cards
- Personal loans
- Secured loans
- Debt consolidation loans
- Joint loans
- Long-term loans
- Student loans
- Business loans
- Car finance
Can I cancel a loan agreement?
If you’ve taken out an unsecured loan, there’s a statutory 14-day period after signing a contract during which you can still cancel. It’s best to contact the lender in writing to do this. If you’ve already received the funds, you’ll have to repay them in full within 30 days.
Once that period has finished, neither party can terminate a loan agreement early unless you both want to or agree that the full terms have already been met. Failing to meet the repayment schedule could see you facing financial and legal repercussions as outlined in the contract.
You can’t cancel a secured loan once you’ve signed the legal charge, but you can withdraw from any potential agreement until that point.
Does a loan agreement have to be witnessed?
Witnesses aren’t legally required when signing a loan agreement. However, either party may want to record a witness to prove the validity of the document should it ever be disputed. This isn’t necessary in most cases, though.
Check your eligibility for a secured loan from Evolution Money
We’re Evolution Money and we offer secured loans for homeowners of up to £100,000. Whether you’re looking to consolidate your debts, make some home improvements or pay for your wedding day, we can provide funds with flexible repayment terms from three to 20 years. Check your eligibility today.
Take a look at some of our customer reviews to see why we’re rated ‘Excellent’ on feefo. Rest assured, all our services are regulated by the Financial Conduct Authority and we’re proud members of the Finance and Leasing Association.
Representative 22.93% APRC variable.
For a typical loan of £26,600 over 180 months with a variable interest rate of 19.56% per annum, your monthly repayments would be £484.00. This includes a Product Fee of £2,660.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £87,030.00. Annual Interest Rates range between 11.7% to 46.5% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
