A loan contract is a written agreement between the party lending the money and the party borrowing the money with the terms and conditions clearly specified and signatures by both the parties notifying the agreement of those terms between them. The terms specifies the amount of loan given, the tenure of loan, the monthly instalment payable every month, the additional charges applicable, the terms amendment rules, etc. In short, the loan contract provides the responsibilities and liabilities of both the parties for the period of the contract.
Points to be kept in mind while preparing a loan contract:
- The loan contract can start by listing the body under which the loan will fall under and whose rules will guide the format of the loan disbursement.
- The loan contract should list the date of agreement between the parties. Date of agreement will mean that both the parties have agreed to the terms of the loan from that date.
- The agreement should also contain the loan disbursement time frame, the dates of equal monthly instalment deduction, currency of deduction, the amount of deduction and the payment mode.
- The name, occupation or business, and complete home and official address need to be mentioned in the loan contract. If the loan contract is given under any collateral, then it should be included in the contract.
- The amount of loan taken and the date of release of that loan to the respective borrower should be clearly specified.
- The values of EMI per month with the interest rate should also be made part of the loan so that the borrower is clear on his liabilities.
- The yearly deduction comprising of the interest component and the principal component will also make the transaction details clear between the parties. This segmentation would help the borrower also apply for other allowances like income tax deduction, etc.
- Finally in the end, the signatures of both the parties should be included.