Loan Extension Agreement

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Loan Extension Agreement

A Brief Introduction of Loan Extension Agreement

A loan extension agreement is a contract through which the borrower of a particular loan is given an additional amount of time for repayment of the same i.e.; his loan period is extended. If a borrower is unable to pay off the loan amount within the stipulated time for any reason, he can approach the lender for a loan extension and seek more time to repay the loan.

The parties will then enter into this agreement to lay down the modified terms of the loan. This contract is necessary to evidence the agreement between the parties to extend the loan period.

Who Takes the Loan Extension Agreement?

This agreement is entered into between the original parties to the loan i.e., the person who gave the loan (known as the “lender” or “creditor”) and the person who borrowed the loan (known as the “borrower” or “debtor”).

Purpose of the Loan Extension Agreement

The purpose of an agreement is to allow the borrower an extended period of time to pay off the loan. The agreement contains the new terms of the loan that have been decided by the parties. It is always better to enter into a written extension agreement in all situations where such extension has been provided by the lender instead of an oral agreement, as this reduces the scope for any dispute or disagreement at a later stage.

This agreement serves as proof of the fact that the lender has given the borrower more time to repay the loan.  In the absence of such an agreement, it becomes very difficult to prove this, and the borrower may be at a disadvantage.

Contents of the Loan Extension Agreement

The contents of the agreement are as follows:

  • The agreement must first identify the parties to the agreement i.e., the lender and the borrower, clearly with their names, addresses, and contact information.
  • The agreement should contain all the details of the loan, including the loan amount, the old maturity date, the interest rate that was applicable on loan and other essential terms.
  • It must then state that the parties have mutually agreed to extend the maturity date and the new maturity date that has been agreed to between the parties must be laid down.
  • The actions that shall be considered a breach of the agreement and possible remedies for it must also be provided.

How to Draft the Loan Extension Agreement?

The following are the steps to follow while drafting an agreement:

  • The parties will have to decide among themselves the new terms of the loan, such as the maturity date, the changed rate of interest if any, and other necessary terms.
  • All the terms as mentioned above should be laid down in the agreement. The parties can use a loan extension agreement form and fill out all the required details. It is a fairly simple agreement and does not have to be too lengthy.
  • Once the agreement has been properly drafted, it must be thoroughly reviewed by both parties.
  • It must then be signed by both parties to make it a legally binding contract.
  • The negotiations in such an agreement will revolve around the period for which the loan shall be extended.
  • The agreement should be drafted in such a way that the rights of the borrower are protected while at the same time providing for the interests of the lender.

Benefits and Drawbacks of the Loan Extension Agreement

The following are the benefits and drawbacks of the agreement:

  • A benefit of this agreement is that the borrower is given extra time to pay off the loan amount. Hence, he gets a reprieve for a certain period of time. This agreement also lays out the manner in which the loan is to be repaid by the borrower, and this will help avoid any possible conflict between the parties.
  • A drawback of entering into this agreement is that the borrower will end up paying a higher interest amount as the loan period is increased.

What Happens in Case of Violation?

The violation of a loan extension agreement is treated in the same manner as the violation of any other loan agreement. Every loan agreement should have a clause that will detail what acts will amount to a breach of the agreement or constitute an event of default. It should also talk about what remedies will be available to the party who has suffered as a result of such violation.

If there is a breach by the buyer or if he fails to repay the loan amount by the specified date, there will be remedies available to the lender. This may depend on a case-to-case basis. One of such remedies is that the entire loan amount may become due on the date on which the default has taken place.

The lender will also have the option of foreclosing or taking possession of the collateral that has been provided under the agreement. To protect the interests of the lender further, the borrower will also be liable to pay the penalty for such default in payment. The borrower will also have certain remedies available under the agreement in case the lender violates any of his obligations under the agreement.

Parties prefer to insert a mandatory arbitration clause in such agreements. This clause ensures that any dispute that has arisen under the agreement will be resolved by an arbitration panel. This helps the parties to resolve any dispute in a speedy manner without having to approach the courts(1).

In conclusion, this agreement is important and must be created when a borrower seeks to extend the loan period. It is imperative to lay down the modified terms of the loan in writing, and this agreement is used for this purpose.