Borrowing a loan is a big financial decision that requires careful consideration. Once you apply for a loan and it gets sanctioned, you receive a loan agreement. Whether you’re borrowing a personal loan, a business loan, or any other type of loan, it’s essential to read and understand the loan agreement. Failing to do so may lead to unintended consequences and financial difficulties.
What is a loan agreement?
A loan agreement is a legal contract between a borrower and a lender that outlines the terms and conditions of a loan. It specifies the amount borrowed, the interest rate, any collateral (if applicable) and other relevant details. It also highlights the terms and conditions of the loan that both parties must adhere to throughout the tenure of the loan.
Let’s look at the different sections of a loan agreement:
- Personal details: This section contains the details of the borrower and the co-borrower (if any), such as their names, mobile numbers and addresses.
- Loan details: This section cover details such as the type of loan, loan variant, loan amount, interest rate and more. It will also have information like the tenure and EMI amount. In some cases, it may even have the purpose for which the loan is being taken.
- Deductions: This section covers information about any deductions made from the loan amount, such as processing fees or stamp duty charges.
- Loan disbursement mode: This section comprises the disbursement mode of the loan amount. It could be through a direct deposit to the borrower's bank account, a cheque, or any other agreed-upon method.
- Fees and charges: This section consists of fees and charges associated with the loan. It includes processing fees, prepayment penalties, late payment fees and any other costs that you may incur during the loan term.
- General terms and conditions: The general terms and conditions section covers various aspects of the loan agreement. It includes information about loan repayment, the consequences of defaulting on the loan, the use of collateral (if applicable) and the borrower's responsibilities throughout the loan term, among other important considerations.
Why is a Loan Agreement Important?
A loan agreement is a legally binding document that outlines the terms and conditions of a loan between a lender and a borrower. It is important as it protects the interests of both parties by clearly defining their rights and responsibilities. The agreement typically includes details such as the loan amount, repayment schedule, interest rate, and any applicable penalties for late payments or defaults.
For lenders, a loan agreement serves as a safeguard to ensure they receive repayment as agreed. It provides legal recourse in case the borrower fails to meet the terms of the loan. For borrowers, the agreement outlines the obligations they need to fulfil while offering transparency on what is expected, such as payment timelines and any consequences of non-compliance.
Additionally, a loan agreement helps prevent misunderstandings by setting clear expectations, and it provides a reference point in case of disputes. In some cases, it may also outline collateral requirements or guarantees, further securing the loan for the lender. Without a loan agreement, both parties are at greater risk of legal complications and financial loss, making it a vital document in lending transactions.
Guide for how to read loan agreement carefully
Reading a loan agreement carefully is essential to fully understand your financial obligations and avoid any surprises down the line. Here's a guide to help you navigate through it.
1. Review Loan Amount and Disbursement Details
Start by checking the loan amount and how it will be disbursed. Ensure that the principal amount mentioned is correct and that the terms for disbursement align with what was discussed.
2. Understand the Interest Rate Structure
Loan agreements often contain information on interest rates, such as whether the rate is fixed or variable. Make sure you understand how interest will accrue and how changes in rates could impact your repayment amount. For variable rates, see the benchmark to which the rate is tied and how often it might change.
3. Repayment Terms and Schedule
Examine the repayment schedule, which specifies how and when payments need to be made. Understand the monthly instalment amount, due dates, and the total loan tenure. If the lender offers flexibility, such as prepayment or restructuring options, these terms will also be included in this section.
4. Fees and Penalties
Loan agreements often have a section detailing fees, including processing fees, late payment charges, and prepayment penalties. Ensure that you are clear about these additional costs, as they can significantly impact the total loan cost. Late payment penalties or default charges should be particularly noted to avoid future issues.
5. Collateral or Security Clauses
If your loan is secured by collateral, review the clauses regarding how it will be handled. Understand what could happen to the collateral in case of default and how repossession works.
6. Check for Insurance Requirements
Some loans may require you to maintain specific insurance, such as life insurance or property insurance for home loans. Make sure you are aware of any such requirements and the costs involved.
7. Rights and Responsibilities of Both Parties
Finally, carefully review the clauses outlining your rights and obligations, as well as the lender's. These clauses may include your rights to access loan-related information, grievance redressal processes, and legal consequences in case of disputes.
By thoroughly reviewing these aspects, you can make informed decisions and avoid financial complications in the future.
How to download your loan agreement?
If you’ve opted for a loan from us, you’ll receive the agreement once your loan amount is sanctioned. You can download it by visiting the customer portal – My Account on our website or using our app.
If you are using Bajaj Finserv customer portal, follow these simple steps to download it.
- Click on the ‘Download’ button on this page to our customer portal.
- Sign-in with your mobile number and the OTP.
- Verify yourself with your date of birth.
- Select the loan account.
- Click on ‘Loan Agreement’ to download it.
If you are using our app, follow these steps to download the loan agreement.
- Click on the ‘Download’ button on this page to go to ‘Document Centre’.
- Select the loan account.
- Click on ‘Loan Agreement’ to download it.
Loan agreement checklist
A loan agreement checklist ensures you cover all key aspects before signing. Here’s what to look for:
- Loan amount and disbursement: Verify the sanctioned amount and disbursement details.
- Interest rate: Understand if the interest rate is fixed or variable and how it's calculated.
- Repayment schedule: Review instalment amounts, due dates, and total tenure to ensure affordability.
- Fees and charges: Check for processing fees, late payment penalties, and prepayment charges.
- Collateral terms: If collateral is involved, review its conditions and repossession clauses in case of default.
- Insurance requirements: Note any mandatory insurance, like life or property insurance.
- Legal clauses: Understand your rights, obligations, and the consequences of non-compliance or default.
- Prepayment and foreclosure: Verify flexibility on early repayments.
This checklist ensures that you're fully aware of the financial and legal implications of the loan.
