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Contracts are the backbone of all commercial dealings, as they provide clarity as to what the parties agreed upon. They are also legally enforceable, so either party can go to the courts to enforce the contract if the other party is not following its terms. Contracts are only as good as the terms they contain, so you must have a well-drafted contract. A contract that you are likely to use at some point is a loan contract, so it is important to know the specific terms that are important for this kind of contract. To help, this article will explain what the most important sections of a loan contract are. 

What is a Loan Contract?

A loan contract is a legally binding contract between a financial institution and a customer. The financial institution will loan the customer money, and the loan contract will dictate what terms the loan is on. The loan contract will contain several important terms so that both parties know their rights and obligations under the contract. 

Important Sections in a Loan Contract

Operative Loan Clause

The operative loan clause is the part of the contract that will determine how you pay the loan. This clause is a vital part of the contract, as it will dictate when each party will pay or receive their money and whether there are any conditions attached to this.

For example, you might need to have your current house valued before taking out a second mortgage.

Guarantees

Another important clause to include in your loan contract relates to guarantees. Loans sometimes need to be guaranteed by a third party if your financial position is not strong. The guarantees clause must specifically define who the guarantee is and how much of the loan they are guaranteeing. This section will likely need a signature from the guarantee. 

Termination Clause

You should also include a termination clause in your loan contract. A termination clause allows either party to terminate the agreement if the other party breaches the contract. For example, a common breach of a loan contract is if the borrower defaults on their loan. In this case, the financial institution can terminate the contract. They can then initiate court proceedings if they wish to recover any damages for loss incurred.

Whoever terminates the contract must first ensure that the other party has actually breached the contract. If you terminate without a breach, you could face legal consequences.

Repayment Terms

A vital clause that you should include in all loan contracts is repayment terms. As the name suggests, repayment terms clearly define how the borrower must repay a loan and how long the loan term is. The financial institution might alter the repayment term throughout the loan term as long as both parties consent. 

Entire Agreement Clause

Some loan contracts might have an entire agreement clause. This clause makes sure that the loan contracts are the only enforceable terms, and excludes any prior discussions with the contracting party before signing. This means that any discussion with a bank manager before signing the agreement is not enforceable. 

Interest

You will be charged interest on all loans that you take out, so it is important that you have a clause that defines how to calculate your interest payment. The interest rate that you pay might change throughout your loan, so you must understand how to calculate this. An interest rate that does not change is referred to as a fixed rate, whereas a rate that does change is called a floating rate. Interest rates can also be fixed for a certain number of years before becoming floating.

Key Takeaways

It is vital that all your loan contract contains all the terms needed to be legally binding. This will help you enforce the contract in court if needed. A loan contract governs the relationship between a lender and a borrower, usually between a bank and its customer. The loan contract will contain terms relating to repayments, interest and guarantees, and explaining the operation of the loan. For legal assistance with loan contracts, contact LegalVision’s New Zealand contracts lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can the bank change the terms of our loan contract after I have signed it?

The bank must get permission from you before they can change the terms of the loan. 

Are entire agreement clauses always enforceable?

No, the courts will only enforce them if they are fair, and if it is reasonable that the contract between the parties is conclusive. 

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