The Basics Of A Lending Contract
A lending contract is a legally binding document between a borrower and lender. It is a credit agreement for mortgages, credit cards, car leases, and other types of loans.
It is crucial to have clear terms in a lending contract to encourage both parties to act in each other’s best interests while fulfilling their own rights and obligations.
2010 California Code Civil Code Chapter 3. Loan Of Money states “A loan of money is a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which he borrowed.”
We advise hiring a business attorney when drafting and signing a lending agreement in California. This article is for informational purposes only and in regards to some essentials of a lending contract.
A lending contract should include basic minimal information such as the names and addresses for each party, loan amount, interest, late fees, payment and default provisions, notice requirements and some general miscellaneous terms.
The lender is the party that agrees to make funds available to the borrower, and the borrower is the party who will receive the funds from the lender, under the terms of repayment. Please make sure to sign on behalf of the company as an officer or agent and avoid signing a loan in your personal capacity unless absolutely necessary.
Make sure that the loan amount is the amount that that the lender and borrower agree to, before interest or fees. The interest charged must be legal (and not considered “usurious”) to be enforceable. The payment schedule and payment terms will provide information that outlines how repayment will be made, such as how interest and fees will apply and whether repayment will be made in periodic installments or a lump sum.
Default provisions outline what actions or lack thereof constitute a default by the borrower and thereby what actions the lender is entitled to take. If the borrower fails to pay on demand with notice, pay the lump sum, or pay the installment, they may be entitled to a grace period, or the lender is entitled to charge penalties to the borrower. Furthermore, the lender may take legal action in the form of a business dispute litigation if repayment is not made by the borrower, effectively breaching the contract.
In some circumstances, the lender requires collateral to secure the repayment of a loan. Collateral is typically an asset owned by the borrower, which they agree to assign in the loan agreement as an item value that the lender may place a lien or seize if the borrower defaults on repayment. In essence, collateral helps secure a loan and minimize the lender’s risk of not being repaid. The lender’s claim to collateral is a lien, giving the lender the right to collect or seize from the borrower in the event that the borrower cannot repay, so as to then sell the asset to satisfy outstanding repayments.
Each state has different laws that apply to lending contracts, which must be satisfied in order to be effective and enforceable. The lending contract should include miscellaneous terms that include which state law governs and where venue or location of any dispute resolution. Further, The lending contract should include a severability clause to outline how the contract will remain in effect if any one particular section is not enforceable. Most lending contracts include a provision to award attorney’s fees and costs to the prevailing party. Further, in order for the lending contract to be legally binding and effective, the lending contract must be signed by the parties involved.
If you have any questions regarding lending contracts, breach of contract or business litigation, call San Diego Business Lawyer Christopher Villasenor to help you with next steps.
Call Us Today: 619-375-2956
Email Us: chris@sdlawfirm.net
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