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Important Clauses to a Loan Agreement

Courtesy/By: Joanna Lisa Mathias | 2021-01-12 13:56     Views : 211

A written agreement between a lender and a borrower is a loan agreement. In accordance with a repayment plan, the borrower agrees to pay back the loan (regular payments or a lump sum). This document is very beneficial to the lender as it legally forces the borrower to repay the loan. It's crucial to consider the essential provisions of a loan agreement. A contract for a loan is a complex document. This step is considered by many borrowers to be a mere formality, and they tend to neglect what is said in this document. In instances where the contract is drafted by the bank, the clauses are constructed in a manner that is favorable to the bank, and so there the borrower must be aware of the clauses before signing the document. This article only highlights the clauses to look out for before signing the agreement. 

1. Definition of Default

It is known that a defaulter is someone who fails to pay the EMIs on loan as per the loan agreement. This isn’t necessarily true in a Loan agreement wherein the definition of Default is much wider. In most cases, it doesn’t only involve non-payment of EMI but also when the borrower is involved in any civil or criminal offense or when the borrower expires and when the borrower is divorced (in the event of a joint loan). In the case of a cross-default, a borrower is also considered a default, that is if he defaults on any other loan provided by any bank or the same bank.

2. The Disbursement Clause

This clause specifies how the money will be paid from the loan. This clause is important to check for noting if the money goes directly to the borrower to the third party. Most banks have disbursement rules of their own. The debtor rarely comes directly into contact with the loan money. In general, the loan is disbursed directly to the builder or, in some cases, directly transferred to the receiving bank.

3. Interest Fluctuation Clause

The interest fluctuation clause grants the bank the freedom to set the interest rate according to fluctuations in its base rate. The bank can change the interest rate as and when they change their base rate without seeking your approval if you are seeking a long-term loan like a home loan. So, it is important to read this clause's terms and conditions.

4. Reset Clause

This clause is applicable to all fixed-rate loans and it is important to read this clause as most of the time if interest rates are on a rising trend then the banks have a reserved right to change the interest rate after a period of 2 to 5 years. In some other cases, no matter the trend in internet rates, banks have the right to alter the rates.

5. Force Majeure Clause

Per this clause, in the case of extraordinary circumstances, or in the case of economic circumstances beyond any control, the bank reserves the right to change fixed interest rates. It is important to read this clause as a fixed rate does not mean fixed forever.

6. Third-Party debt collection Clause

In case of default on the payment of the loan, the lender has the right to share your personal information with third parties of their choosing, for the purpose of repaying the loan. 

7. Amendment Clause

In fact, this tricky clause gives the bank the right to make adjustments to any clause in the document of the loan agreement without obtaining the borrower's permission. This is a major loophole that needs to be carefully scrutinized.

 

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.

Courtesy/By: Joanna Lisa Mathias | 2021-01-12 13:56