Managing Loan Agreements

A loan agreement is a legal arrangement between a lender and a borrower that governs the terms of the loan. The loan agreement sets forth the terms and conditions of the loan including any fees and the interest rate that the loan charges. A borrower should understand how the loan agreement works in order to better understand the loan and mange it.

Understanding the Loan Agreement

Managing a loan agreement involves understanding the elements of the contract. In many cases, a loan agreement between a lender and a borrower is known as a contract of adhesion, where one side (lender) drafts the terms of the contract and the other side (borrower) either accepts those terms or refuses and does not sign the contract. In some cases however a loan contract can be a negotiated contract that represents the concerns of both parties coming to the table in agreement.

Type of Contract

It is important to understand whether the contract is a contract of adhesion or a negotiated contract as it will determine the amount of say that a borrower has over the loan agreement. Negotiated contracts gives a borrower more rights and say regarding the contracts terms and conditions and can be managed better than a contract of adhesion. The only right a borrower has in a contract of adhesion is to walk away from it entirely and not sign the agreement.

Loan Agreement Conditions

Other conditions of the contract or loan agreement include provisions regarding default, payments any amendments or waivers of conditions, interest and the period in which interest is charged. These conditions set forth how the loan agreement will be enforced and the expectations of each party in the agreement. The borrower's rights and responsibilities should be clearly set out in the agreement and set in language that is understandable.

Ambiguities in a Contract of Adhesion

Contracts of adhesion that are written by the lender must not contain any ambiguous or legally vague language. Such a contract is written by lawyers that could be confusing for a lay person to interpret; courts tend to take the position that such contracts are ruled in favor of the borrower or the party that did not draft the agreement. This is referred to as ambiguities in a contract of adhesion.

Understanding the elements of the contract and the type of loan agreement is beneficial for both the lender and the borrower. The better understanding that a borrower has about what is contained in a loan agreement, the easier it is to pay back the loan as agreed upon and the lesser the chance for misunderstanding or disagreement.