A Brief Introduction About Loan Collateral Agreement
It is the job of many banks and lending organizations to provide loans, but it is always a threat to them. They are always under pressure because they are not sure if the borrower will successfully return the loan amount. Thus, these banks and organizations prefer a secured loan over a normal loan.
In a secured loan, the borrower gives something as security to the bank, which can be used by the bank if the borrower fails to repay the loan amount. The collateral can be something that the bank can sell to compensate for the loss, for instance, a property, jewelry, etc. A loan agreement that includes the details of such collateral is known as Loan Collateral Agreement. It should be noted that the banks never give a loan of the exact same amount of the collateral.
Banks always approve a loan amount that is less than the value of collateral because the value of the collateral may decrease in the future. Banks want to complete security when it comes to their money. Other names for a Loan Collateral Agreement are Loan Agreement with Collateral, General Loan and Collateral Agreement, and Private Mortgage Loan Agreement.
When Do You Need the Loan Collateral Agreement?
The agreement is needed if you are a bank or an organization that is giving a loan with security. It is also needed if you are a borrower who is taking the loan and promising security to the lender.
The main purpose of the agreement is to ensure that both parties know the terms and conditions. It also reduces the possibility of any conflict or misunderstanding. It mentions all the details of the collateral and how it can be sold by the bank in case of default by the borrower. The borrower must calculate the risk involved before he or she promises security to the bank. In case the borrower doesn’t default, the bank safely returns the collateral.
Inclusions in the Loan Collateral Agreement
Like any other loan agreement, a Loan Collateral Agreement must contain the basic details of both the borrower and lender. Basic details include the name, address, phone numbers, etc. Further, the agreement must contain details related to the loan, such as loan amount, term, starting date, the interest rate applicable, termination, cancellation, etc. It should also contain details about the late payment fee.
Further, the agreement must include the details about collateral. It can have details about its current value and anticipated future value. The terms related to the collateral are one of the most important inclusions in the agreement. How the repayment should be made is an important question that the agreement must answer. The details related to the bank account should be added to the agreement.
How to Draft the Loan Collateral Agreement?
To draft the agreement, the bank must first do a security check. Banks can’t afford to offer loans to just anyone. They need to do a credit score check and other important document checks. With collateral loan schemes, it is easier for people to get a loan with a bad credit score. Further, the borrower must be aware of all the important details related to the loan and security. He or she should realize that they are putting their collateral at risk.
Both parties should also read the details of the governing laws so that in case of any major default, they know how to get help. The agreement should, however, solve many problems on its own by giving a dispute resolution method. The borrower should choose collateral very smartly. In case of any failure in repayment, the lender immediately tries to recover the money by selling the collateral. Thus, the borrower should cautiously decide what he wants to put at risk.
Benefits & Drawbacks of the Loan Collateral Agreement
A well-drafted Loan Collateral Agreement helps all the parties involved. It works as a solid proof of the relationship between a borrower and a lender. Here are some of the benefits of this agreement.
- It gives dispute resolution methods
- It ensures that there are no misunderstandings and confusions between the borrower and the lender
- It lists down all the important information related to the loan
- It gives detailed information about the interest rate
- It ensures that the banks provide loans with a low-interest rate
- It ensures that the borrower gets a loan even with bad credit history
- It allows people to take a loan easily
- It secures the bank
- It ensures that the bank doesn’t feel threatened
Here are some of the drawbacks of the agreement –
- Risk is involved
- The borrower receives only 60-70% of collateral’s value as a loan
Key Terms/Clauses in the Loan Collateral Agreement
The agreement must contain the information related to governing laws. Further, each bank can decide on its own terms and regulations. Both parties should just be aware of these details before they sign the agreement. Key terms in the agreement are related to the loan repayment, late fee, termination, collateral related terms, etc.
Clauses that must be added in the agreement are force majeure, confidentiality, miscellaneous, etc. If parties fail to understand any of the terms, they should consider seeking legal help. They must talk to a loan expert or attorney before they draft the agreement.
What Happens in Case of Violation?
In case of any default by the borrower, the lender can sell the collateral as per the written terms in the agreement. Both parties have to follow the dispute resolution methods mentioned in the agreement. In case, the matter gets aggravated, and parties are unable to solve the matter, they are well within their rights to approach the court. Parties can also mention a mediator’s name while drafting the agreement. In such a case, the parties can ask the mediator to help them in case of any breach. It is suggested that parties take legal help if the matter escalates.
A Loan Collateral Agreement is an extremely important piece of document. Many people nowadays rely on collateral loans or secured loan systems. All loan agreements are crucial, but a collateral loan is an even more solid document as it contains information related to the collateral. There are many examples of Loan Collateral Agreements, such as personal loans, small business loans, or auto loans. Parties should read the agreement before signing it.
Sample for General Loan and Collateral Agreement
A sample of the agreement can be downloaded from below.
General loan and Collateral Agreement
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