Understanding Your Obligations in Relation to Loan Agreements – Borrower Perspective

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Table of Contents

• What Are My Obligations Under My Loan Agreement?
• What Are the Consequences of Non-Compliance?
• Key Takeaways

A loan agreement is an agreement between two parties. One party (known as the ‘lender’) agrees to provide a loan to the other party (the ‘borrower’). The borrower will have various obligations under a loan agreement. The terms of each loan agreement will differ. To better understand how loan agreements will affect you (as a borrower), this article will explain the most common obligations a borrower will have. 

What Are My Obligations Under My Loan Agreement?

If you are a borrower, you will have essential obligations under your loan agreement. The most common obligations you may have are listed below.

Purpose

You might have to use the money you borrow for a particular purpose. The lender might want to restrict how you use the money because it might consider some uses too risky.  If the loan is for personal or domestic use, then the lender will need to comply with certain consumer protection laws. This will affect what is in the loan agreement. 

Repayment of the Principal Loan Amount

You will be obliged to repay the lender’s principal loan amount. Details of exactly when and how you must repay the principal loan will depend on the loan agreement’s terms. Generally either the full amount is due on one particular date, or the amount is payable in instalments over time.

Payment of Interest

You may have to pay interest on top of the principal loan amount. If so, the loan agreement will set out dates on which interest is payable and how interest is calculated. Generally, the more risky the loan, the higher the interest rate. Additionally, default interest may be payable if you do not pay an amount on its due date. Further, default interest aims to stop you from defaulting. 

Payment of Fees

You may have to pay some additional fees to the lender. For example, if you have a line of credit, the lender might charge you a line fee or a utilisation fee. The lender will calculate this fee on the total amount you could draw (even if you have not yet drawn any amount). If the lender intends to charge you any additional fees, they should outline these fees in your loan agreement, including the date they are payable.

Payment of Costs and Expenses

You may need to pay or reimburse the lender for any costs and expenses concerning the loan agreement and any security documents (such as lawyer’s fees, registration fees and stamping costs). If you or the lender expects this, it should be set out clearly in the loan agreement.

Provision of a Guarantee or Security

You may need to obtain a third-party guarantee or provide some form of security for the loan. This is often the case, particularly if you have a bad credit history or if the loan amount is significant. The loan agreement will refer to this requirement and may contain the guarantee’s provisions. 

However, a separate security document generally provides for any security. This document can be a general security agreement, a specific security agreement or a real property mortgage. As mentioned above, you will usually need to provide guarantees and security if:

• you are high credit risk; 
• the loan amount is high, or 
• the lender requested an added layer of protection. 

If you do not pay the loan amount, then the lender might take the secured property, or call on your guarantor to pay on your behalf.

Provision of Financial Information

You will likely need to provide on-going financial information to your lender. If you are an individual, you might have to provide statements of your financial affairs. Or if the borrower is a company, you may have to provide its financial statements. This is so that the lender can monitor your financial position and ensure you remain able to repay all amounts due under the loan agreement.

Other Covenants

The loan agreement may contain other covenants. These are basically promises by you to do or abstain from certain things (such as borrowing more money, disposing of valuable assets, entering into other loan agreements, mortgaging your property). These covenants aim to minimise the risk of you being unable to repay the loan.

What Are the Consequences of Non-Compliance?

Failure to comply with an obligation is likely to be an event of default. Following an event of default, the lender will usually have the following contractual rights:

• if the loan amount has not been lent, the lender does not need to lend any more money;
• if the loan amount has already been lent, the lender can make the loan and any other money you owe (including any unpaid accrued interest and fees) immediately due for repayment; and
• if the loan is secured, the lender may enforce its security to ensure you repay all monies you owe in full. This might involve taking your property and selling it.

Additionally, the event of default can also constitute a breach of contract or misrepresentation. In this case, the lender can make a claim against you for any losses it incurs as a result of such breach or misrepresentation.

Key Takeaways

As a borrower, you will have many obligations under a loan agreement. Above, we discuss the most common obligations, but each loan agreement is different. Therefore, it is essential to thoroughly review and understand your loan agreement before signing it. The consequences of not complying with your obligations can be severe. If you require assistance to draft or review a loan agreement contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.