Things you need to know about Contract for Unsecured Loan.
1. What is a Contract of Loan?
A Contract of Loan is a legally binding document where a person lends money (the “lender”) to another person (the “borrower”) subject to the borrower’s obligation to repay, sometimes with interest. The loan contract stipulates the terms of the loan such as the (1) amount loaned; (2) interest rate; and (3) terms of payment.
A Contract of Loan may also be either secured or unsecured. A secured loan refers to a loan protected by a collateral which the lender can sell if the borrower fails to timely pay the loan. A collateral can be either movable property (i.e. jewelry) or immovable property (i.e. a house). On the other hand, an unsecured loan refers to a loan that offers no collateral and leaves the lender with no property that can be readily sold to pay off the loan if the borrower defaults.
With Legal Tree you can easily create and customize the right Contract of Loan for you depending on your situation.
2. When do you need a Contract of Loan?
A Contract of Loan is needed when you lend money to another person. A loan contract serves as proof that you lent money to another person and that you expect to be repaid according to the terms agreed upon.
It is hard to rely on a verbal agreement of loan because this is difficult to prove in court and people can easily forget their commitment to pay or other important details regarding the loan.
3. How is a Contract of Loan different from a Promissory Note?
Both documents are used to govern transactions for lending money. However, a Contract of Loan is best used for loans involving large sums of money and when the terms of the loan are complicated.
On the other hand, use a Promissory Note if the loan involves only a small amount of money and contains simple and straightforward terms.
4. How can a Contract of Loan protect you?
The Contract of Loan can protect the lender if the borrower:
- Fails or refuses to repay the loan;
- Insists that the money or property loaned was merely a gift; and
- Violates the terms of the loan (i.e. missed due dates, failure to put up collateral).
In the cases above the lender may invoke the Contract of Loan to demand that the borrower comply with its terms. If the borrower still refuses to comply the lender can file a complaint in court to either (a) enforce payment; or (b) cancel the loan, and claim damages from the buyer.
For the borrower the Contract of Loan puts in writing his rights and obligations under the loan and what is expected from him (i.e. when he has to repay the loan). The Contract of Loan also acts as a restriction on the lender because the lender cannot unilaterally change the terms of the loan without the borrower’s consent. For example, once the parties agree on the interest rate the lender cannot unilaterally increase the interest rate without the borrower’s consent.
5. What information do you need to create a Contract of Loan?
To create your Contract of Loan you’ll need the following minimum information:
- The type of borrower (i.e. individual or business) as well as name and details (i.e. nationality and address)
- The type of lender (i.e. individual or business) as well as name and details (i.e. nationality and address)
- Basic terms of the loan (i.e. amount loaned, interest rate and terms of payment)