Five Important Sections in a Loan Contract

In Short

• A loan contract outlines the terms of a loan agreement between a borrower and a lender, specifying key obligations and rights.

• The five important sections to review are: Definitions and Interpretation, Financial Terms, Transaction Details, Termination Rights, and Boilerplate Clauses.

• Understanding these sections is crucial to protecting your interests and ensuring the agreement aligns with your needs.

Tips for Businesses
When reviewing a loan contract, focus on understanding the definitions, financial terms, and the transaction obligations. Pay special attention to termination clauses and the boilerplate section, as these can have significant legal implications. Always consult with a legal advisor to ensure the contract protects your interests and meets your business needs.

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Table of Contents

• 1. Definitions and Interpretation
• 2. Financial Section
• 3. Transaction Section
• 4.  Termination Section  
• 5.  Boilerplate Section
• Key Takeaways
• Frequently Asked Questions

Taking out a loan is a significant financial commitment, so it is essential that you thoroughly understand the terms of this contract. A loan contract is an agreement between two parties whereby one party (the lender) agrees to provide a loan to the other party (the borrower). A loan contract can be a long and often complex document. Therefore, it is essential that you understand your rights and obligations under the agreement. This article will examine the structure of a loan agreement. 

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1. Definitions and Interpretation

The definitions and interpretation section defines all the terms to be used throughout the loan contract. Any capitalised term used in the document will be defined in the definitions and interpretation section.

Some key terms in the definitions section include: 

• the loan amount
• interest rate; and 
• payment or repayment dates. 

2. Financial Section

This section sets out the operational terms of the loan contract. Generally, it will address:

• the loan amount;
• whether the borrower is borrowing all the money upfront, or at certain points of the term; 
• interest to be paid and how interest will be calculated (for example, on a fixed or floating rate);
• the repayment schedule for both interest and capital. In some cases, the lender may require the borrower to make regular repayments during the term, or, alternatively, pay the full amount at the end of the term; 
• if the loan is secured or unsecured; and
• any additional fees or charges associated with the loan, such as annual fees, late payment fees or prepayment charges.   

The two parties will usually focus heavily on this section, whilst leaving the other sections to be reviewed by their lawyers (if they are using external counsel).

3. Transaction Section

This section relates to the specific details of the transaction itself. The major terms and conditions of the loan contract are set out in this clause, including the parties’ responsibilities. Generally, a borrower is subject to most of the obligations outlined in a loan contract. 

Obligations on the borrower include: 

• if the loan contract includes a purpose, the obligation on the borrower to use the loan for that purpose only; 
• repayment of the loan amount;
• payment of interest and any other fees; 
• obtaining a third-party guarantee or providing security for the loan; and
• providing ongoing financial information to the lender. 

A loan contract also includes obligations on the part of the lender. These generally relate to the lender’s: 

• financial position and ability to provide the loan to the borrower; and 
• legal position to enter into the contract.

4.  Termination Section  

This section sets out the circumstances in which you can end the agreement. As a loan agreement involves significant liabilities, you should ensure that you can terminate the agreement if problems arise. Typically, loan agreements will include termination rights for the lender if the borrower: 

• fails to make payments; 
• breaks the agreement’s terms;
• becomes insolvent or bankrupt; and
• faces significant changes in its financial condition. 

As a borrower, you should negotiate the right to end the agreement if the lender: 

• can not provide the funds; and
• does not fulfil their obligations.

You should also consider adding clauses that set out what will happen to the repayments if the agreement is terminated due to the lender’s breach of the agreement. 

5.  Boilerplate Section

The boilerplate section outlines all the standard clauses that the parties typically expect to see in a loan contract. Usually, these relate to issues such as governing law, disputes, force majeure and address for service. The boilerplate section is usually the longest section in a loan contract. While these clauses are relatively standard, they may outline essential details about how the agreement will operate. You should review these clauses and discuss them with your legal advisor if you have any questions. 

Key Takeaways

Generally, loan contracts follow a set structure. However, there is no legal requirement to observe this structure; it is simply a convention. When drafting a loan agreement, it is essential to understand the necessary sections. The five main sections are the definitions and interpretations, the financial section, the transaction section, the termination and boilerplate section. Understanding these sections will help you navigate the complexities of loan agreements and protect your interests throughout the borrowing process.

Frequently Asked Questions

What is a loan agreement?

A loan agreement is a contract between a borrower and a lender that outlines the terms of the loan, whereby the lender provides a loan to the borrower. Generally, as a term of the agreement, the lender will receive interest in addition to the loan.

What is a boilerplate section in a loan agreement?

A boilerplate section typically includes standard clauses in a contract, such as termination and amendment provisions. They are generally not subject to negotiation. As they are drafted in a standard manner, they often take very little time to review.