One of the most important clauses in a loan agreement is the repayment clause. This sets out how and when the Loan (as opposed to the Principal) is to be repaid by the borrower to the lender.
Distinction between Principal and Loan
One of the most important points to note is the distinction between the amount advanced by the lender to the borrower (usually referred to as the Principal) and the amount of Principal that has not been repaid or prepaid under the loan agreement (usually referred to as the Loan). The borrower should only ever be obliged to repay the Loan (i.e. not the Principal) on a specific date, just in case the borrower has already paid instalments of Principal or has partially prepaid the Loan prior to that date, and this should be made clear in the loan agreement. On termination of the loan agreement, however, the borrower will have repaid the full amount of the Principal in total.
The parties will generally agree when the Loan should be repaid. There are several options including the following:
- Repayment of the entire Loan to be made on one date which is specified in the document (usually referred to as the Repayment Date); and
- Repayment to be made in instalments over a period of time (each instalment usually referred to as a Repayment Instalment to be made on a Repayment Date). If this option is used, the parties will usually insert a repayment schedule in the loan agreement and the schedule will set out each Repayment Date and each Repayment Instalment clearly.
The repayment clause may of course be overridden if an event of default occurs. If an event of default occurs then the lender may request that the Loan be repaid immediately (rather than on the relevant repayment date).
The prepayment clause sets out whether or not the borrower can prepay the Loan and, if so, whether it can prepay the Loan partially or just fully. Sometimes a lender may charge a fee for prepayment due to the fact it will lose out on the interest payments it was expecting to receive from the borrower over the life of the loan.
The loan agreement will usually set out how payments and repayments are to be made to the lender. For example it may state that payments are to be made:
- at a place and in a manner reasonably required by the Lender;
- by 11am in the place where payment is required to be made; and
- in immediately available funds and without set-off, counter claim, condition or, unless required by law, deduction or withholding.
This is to make sure that the Lender receives all of the money owing to it and can easily verify the same.
The loan agreement also usually includes a clause to the effect that the lender may use any money it receives from the borrower under the loan agreement in any manner it thinks fit.
Gross up clause
The loan agreement will generally include a gross up clause. This ensures that, if the Borrower is required to deduct or withhold taxes from any payment to the lender, it will pay the lender an additional amount so that, after the deduction or withholding, the lender actually receives the full amount.
There are many important clauses in a loan agreement. We have already explored some of them with you and will be exploring some of the other clauses over the coming weeks.