Loans Demystified

Loans are detailed and complex documents that have numerous provisions, over the next few articles we will review just a few of the issues involved in the loan agreement.

In addition to the well-known home loan there are also a plethora of personal and business loans of various types.

Loans can be fixed or variable or some combination thereof, and mortgages can be low documentation (low doc) or can offer an introductory rate at the start of the loan.

The two primary types of loan agreements are secured and unsecured.

If you enter into a secured loan agreement you must provide some form of security to the lender, but whether secured or unsecured you will likely be required to provide a guarantee.

A guarantor usually provides a limited guarantee. Often, this will cover the debt plus a percentage of any additional expenses including interest incurred if the loan repayments are late.

Standard provisions in most loans include the:

  • amount of the loan;
  • interest rate;
  • loan is secured or unsecured;
  • term of the loan (how long the borrower has to repay the loan);
  • amount of repayments; and
  • frequency of repayments.

Parties should never enter into a loan without seeking legal advice.

Loan Documents

If you are going to be a guarantor under a loan, so that is the person providing security over their property, you should receive a significant number of documents from the lender.

These documents should include a copy of the loan agreement ready-to-be-signed, so the terms and conditions so these can be fully and comprehensively reviewed by you and/or your lawyer, and a clear and concise document that explains your rights and duties as guarantor.

On any guarantee, there must be notice provided to the prospective guarantor that states the potential guarantor should seek independent legal and financial advice about the guarantee, and how it may affect them if the borrower defaults, and note that they may if they wish, refuse to become a guarantor as it involves a level of financial risk that should be carefully considered.

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