A loan agreement (also known as a lending agreement) is a

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

between a borrower and a lender which regulates the mutual promises made by each party. There are many types of loan agreements, including "facilities agreements", "

revolvers A revolver is a repeating handgun with at least one barrel and a revolving cylinder containing multiple chambers (each holding a single cartridge) for firing. Because most revolver models hold six cartridges before needing to be reloaded, ...

", " term loans", "

working capital Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...

loans". Loan agreements are documented via a compilation of the various mutual promises made by the involved parties. Prior to entering into a commercial loan agreement, the "borrower" first makes representations about his affairs surrounding his character, creditworthiness, cashflow, and any collateral that he may have available to pledge as security for a loan. These representations are taken into consideration and the lender then determines under what conditions (terms), if any, they are prepared to advance money. Loan agreements, like any contract, reflect an "offer", the "acceptance of the offer", "consideration", and can only involve situations that are "legal" (a term loan agreement involving heroin drug sales is not "legal"). Loan agreements are documented via their commitment letters, agreements that reflect the understandings reached between the involved parties, a promissory note, and a collateral agreement (such as a

mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...

or a

personal guarantee A personal guarantee is a promise made by a person or an organization (the guarantor) to accept responsibility for some other party's debt (the debtor) if the debtor fails to pay it. In the case of a personal guarantee made by an individual on beha ...

). Loan agreements offered by regulated banks are different from those that are offered by finance companies in that banks receive a "banking charter" granted as a privilege and involving the "public trust". Loan agreements are usually in written form, but there is no legal reason why a loan agreement cannot be a purely oral contract (although oral agreements are more difficult to enforce).

Types

For commercial banks and large finance companies, "loan agreements" are usually not categorized although "loan portfolios" are often broadly characterized into "personal" and "commercial" loans while the "commercial" category is then subdivided into "industrial" and "commercial real estate" loans. "Industrial" loans are those that depend on the cashflow and creditworthiness of the company and the widgets or service that it sells. "Commercial real estate" loans are those that repay loans but that depend on the rental revenues paid by tenants who lease space, usually for extended times. More granular categorizations of loan portfolios exist but these are always variations around the larger themes. The loan agreements originated by commercial banks, savings banks, finance companies, insurance organizations, and investment banks are very different from each other and all feed a different purpose. "Commercial banks" and "Savings banks", because they accept deposits and benefit from FDIC insurance, generate loans that incorporate the concepts of the "public trust". Prior to interstate banking, that "public trust" was easily measured by State bank regulators who could see how local deposits were used to fund the working capital needs of local industry and businesses, and the benefits associated with those organization's employment. "Insurance" organizations, who collect premiums for providing either life or property/casualty coverage, created their own types of loan agreements. "Banks" and "Insurance" organizations' loan agreements and documentation standards evolved from their individual cultures and were governed by policies that somehow addressed each organizations liabilities (In the case of "banks", the liquidity needs of their depositors; in the case of insurance organizations, the liquidity needs associated with their expected "claims" payments). "Investment banks" create loan agreements that cater to the needs of the investors whose funds they attempt to attract; "investors" are always sophisticated and accredited organizations not subject to bank regulatory supervision and the need to cater to the public trust. Investment banking activities are supervised by the SEC and their main focus is on whether the correct or proper disclosures are made to the parties who provide the funds. Types of Loans: * bilateral loans *

syndicated loan A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers. The syndicated loan market is the dominant way for l ...

s (a syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several

commercial bank A commercial bank is a financial institution that accepts deposits from the public and gives loans for the purposes of consumption and investment to make a profit. It can also refer to a bank or a division of a larger bank that deals with whol ...

s or

investment bank Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

s known as lead arrangers). Categorizing loan agreements by type of facility usually results in two primary categories: * term loans, which are repaid in set installments over the term, or * revolving loans (or

overdraft An overdraft occurs when something is withdrawn in excess of what is in a current account. For financial systems, this can be funds in a bank account. In these situations the account is said to be "overdrawn". In the economic system, if there i ...

s) where up to a maximum amount can be withdrawn at any time, and interest is paid from month to month on the drawn amount. Within these two categories though, there are various subdivisions such as

interest-only loan An interest-only loan is a loan in which the borrower pays only the interest for some or all of the term, with the principal balance unchanged during the interest-only period. At the end of the interest-only term the borrower must renegotiate anot ...

s, and

balloon payment A balloon payment mortgage is a mortgage that does not fully amortize over the term of the note, thus leaving a balance due at maturity.Wiedemer, John P, ''Real Estate Finance, 8th Edition'', p 109-110 The final payment is called a ''balloon p ...

loans. It is also possible to subcategorize on whether the loan is a

secured loan A secured loan is a loan in which the borrower Pledge (law), pledges some asset (e.g. a car or property) as collateral (finance), collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thu ...

or an unsecured loan, and whether the rate of interest is fixed or floating. Promise to Repay Forms of loan agreements vary tremendously from industry to industry, country to country, but characteristically a professionally drafted commercial loan agreement will incorporate the following terms: # Parties to contracts with their addresses # Definitions or interpretation provisions # Facility and purpose # Conditions precedent to utilization # Repayment provisions # Prepayment and cancellation provisions # Interest and interest periods # Provisions dealing with

gross-up A gross-up clause is a contract provision which provides that all payments must be made in the full amount, free of any deductions without exercising any right of set-off. The provision will usually indicate that if there is a mandatory withholdi ...

in relation to any

withholding Tax withholding, also known as tax retention, pay-as-you-earn tax or tax deduction at source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the ...

imposed # Payments provisions # Representations of the

borrower A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of thi ...

# Representations of the lender # Covenants of the borrower # Events of default # Remedies in the event of default # Provisions for penalties and liquidated damages # For syndicated loans, provisions relating to the facility agent and security agent and voting of the lenders # Formulae for calculations # Provisions for fees of the lenders # Provisions for expenses #

Securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and sellin ...

provisions # Amendments and waivers provisions # Covenants relating to changes in parties # Set-off clause #

Severability clause In law, severability (sometimes known as salvatorius, from Latin) refers to a provision in a contract or piece of legislation which states that if some of the terms are held to be illegal or otherwise unenforceable, the remainder should still apply ...

# Counterparts clause # Addresses for notices # Language provisions #

Choice of law clause In contract law, a choice of law clause or proper law clause is a term of a contract in which the parties specify that any dispute arising under the contract shall be determined in accordance with the law of a particular jurisdiction. It determi ...

Forum selection clause In contract law, a forum selection clause (sometimes called a dispute resolution clause, choice of court clause, governing law clause, jurisdiction clause or an arbitration clause, depending on its form) in a contract with a conflict of laws ...

Types

See also

References

Footnotes

Citations