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A loan agreement is an agreement where one person (the lender) agrees to provide a loan to the other person (borrower). Loan agreements can be secured or unsecured. Each type of loan has different obligations and protections for borrowers and lenders. 

Loan Agreements in Australia

A loan agreement (or facility agreement) sets out the terms on which somebody has lent money. It is an essential legal document to:

  • enforce the terms of the loan; and
  • show that the money was a loan and not a gift.

Unsecured and Secured Loan Agreements

A loan agreement might be secured or unsecured. Unsecured loan agreements mean lenders do not have any claim to borrowers’ assets in priority against other creditors of the borrower if the borrower defaults (i.e. does not pay back the money). 

If a loan is secured, the borrower has granted security to the lender over all or some of the borrower’s assets. If the borrower defaults, the lender can try to recover its money by selling those assets and using the sales proceeds to repay the debt. 

Usually the borrower will grant security under a different agreement to the loan agreement, for example, a general security agreement or a specific security agreement. Merely describing a loan as secured does not make it a secured loan. You need to have an express provision in an agreement stating that the borrower grants security to the lender over the relevant assets.

Loan Agreement Clauses

While each loan contract is different, each contract will usually the following types of clauses.

Loan Clause

The operative loan clause sets out when and how money you are lending.

For example, the lender may not have to lend until certain conditions are satisfied (e.g. the delivery of certain information by the borrower).

The clause might state the account that you will need to pay the money into. Most importantly, it will also tell you how much money you are lending. You may be:

  • borrowing all the money upfront; or
  • only borrowing some money upfront and the rest at a later stage in time. 

Interest

Your lender might require you to pay interest on money you borrow. There will be a clause in your agreement telling you:

  • the interest rate; and
  • how interest is calculated.

You might be required to either pay interest at fixed or floating rate. A fixed fee interest rate is set at specific rate. This rate will not adjust during the term of the agreement unless agreed by both parties (for example, 7% per annum). A floating fee will be based on a set margin (for example, 2%) added to a benchmark rate that may change every day. In Australia, this usually be the bank bill swap rate (BBSW), which adjusts with the Reserve Bank of Australia’s cash rate target. 

Default Interest

You might be required to pay default interest under your agreement. This is an interest rate that will apply if you do not pay money on the due date. The default rate is usually higher than your interest rate. This rate should accurately reflect the cost to the lender of the amount not being paid when due. 

You might agree with your lender that they can capitalise any part of the interest which becomes due and payable and you fail to pay on its due date. This means the lender will add the interest to the outstanding principal amount, for the purposes of calculating interest (including default interest).

Repayment Clause

A repayment clause tells you when you must repay the loan. The lender might require you to:

  • make regular payments during the term of the loan; or
  • repay at the end of the term. 

Key Takeaways

If you are borrowing from a bank, you might first be asked to sign a letter of offer which will summarise the key terms of the loan you are entering into. If your company is borrowing money, the lender may require the directors to sign personal guarantees. This is a significant obligation and you should always get legal advice before signing any guarantee. If you are borrowing money under a loan agreement and you breach the agreement (for example, by giving the lender false financial information), the lender might sue you. If this occurs, they may try to claim for an amount greater than the amount of money you have borrowed. 

Frequently Asked Questions

What is a bilateral loan or syndicated loan?

A bilateral loan is where there are only two parties. It is used in simpler, more basic transactions. A syndicated loan will be used in more sophisticated loan transactions, where there are several lenders (usually banks and other financial institutions).

Does the National Credit Code (NCC) apply to my Loan Agreement?

The NCC will only apply if the lender provides credit in the course of a business of providing credit or as part of, or incidental to, any other business.

What is a lump-sum payment?

In a lump-sum payment, the borrower repays the lender with a single one-time payment at the end of the loan term.

What is a principal and interest payment?

The borrower will make regular payments that count towards both the principal amount and the interest as it is compounded. At the end of the term, there will be no outstanding balance. For this reason, you can only choose a principal and interest payment plan when the loan agreement has a fixed term length.

Are representations and warranties important in loan agreements?

Yes. You should ensure you have a lawyer read these clauses before entering into them. If you make a representation which is not true, the lender might sue you for an amount greater than the amount you have borrowed. You must ensure prior to entering into a loan agreement that all representations and warranties in the agreement are true.

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