Loan Agreements

A Loan Agreement is a legally binding contract issued by the lender to the borrower that outlines the terms of repayment, what will happen in the event of late or non-payment, and other contractual items. Loan agreements are usually quite long and complex so it’s best to have a lawyer review it before signing. They are typically used for business loans, mortgages, car loans, and personal loans when larger amounts are involved.

Regardless of who you are lending money to, it is crucial to have a written contract in place. This is because verbal agreements are often difficult to enforce. Having a clear Loan Agreement will ensure that you are not left guessing about when the debt will be repaid. Moreover, having a Loan Agreement will ensure that you will have legal remedies in case things take a turn for the worse.

Here are the key elements that should be included in every Loan Agreement:

• Effective date
• Loan amount
• Loan payment terms and repayment schedule (e.g., lump sum payments or monthly payments)
• Interest rate and frequency
• Payment method
• Collateral (if applicable)
• Penalties upon default
• Dispute resolution (e.g., arbitration or mediation)
• Amendment
• Termination
• Entire Agreement
• Governing Law

When lending money to family members (e.g., spouse or children), special considerations apply that make it very important to have a Loan Agreement in place. First, the presumption of advancement may apply. This means that it is presumed that the amount transferred is a gift. The court has provided a number of factors to help determine whether an advancement of money is a gift or a loan. Some of these factors include whether there are documents evidencing a loan, whether there is security (collateral) held for the loan, whether the manner for repayment is specified, and whether there is an expectation or likelihood of repayment. As such, it is crucial to have a Loan Agreement signed if you intend to be repaid. Otherwise, it may be presumed to be a gift.

Another reason why it is important to have a Loan Agreement when lending money to family members is because there is a presumption that there is no intention to create legal relations between family members. Courts have historically assumed that family members do not intend to create legal relations between one another. If there is no intention to create legal relations, then there is no contract. If there is no contract, then nothing can be enforced. As such, a Loan Agreement is needed to overcome this presumption. This agreement demonstrates that there is indeed an intention to create legal relations and that the borrower is aware of potential legal consequences upon default.

A lender can choose whether or not they wish to charge interest. If they do decide to charge interest, then they should be aware of the Criminal Code prohibitions against charging a criminal rate of interest. In Canada. it is an offence to enter into an agreement to receive interest at a criminal rate. A “criminal rate” is one in which the annual percentage rate exceeds 60%. This is determined by taking into consideration all related fees, fines, and charges associated with the agreement. Therefore, careful consideration should be paid to how much interest to legally charge.

Moreover, there may be tax consequences to the lender for the interest income they receive.

Loan Agreements are very similar to Promissory Notes aside from a few differences. First, Loan Agreements are typically more formal and complex. They usually include more specific and comprehensive terms. Second, both the borrower and the lender sign a Loan Agreement whereas in a Promissory Note, typically only the borrower signs. This means that there is no obligation for the lender to do anything in a Promissory Note.

For small loan amounts and more informal relationships, we recommend going with a Promissory Note.

It is important to figure out how you will recover your money if the borrower defaults on the loan. Collateral refers to assets pledged by the borrower that the lender can seize and sell to recoup their losses if the loan is not repaid according to the terms of the Loan Agreement. In the absence of collateral, if a borrower defaults, the lender must take the lender to court. This process can be lengthy and complex, and there is no guarantee that the lender will be able to recover all of their losses.

Taking collateral for a loan provides the lender with a significant advantage in the event of default. By seizing and selling the collateral, the lender can recover their losses more quickly and efficiently. The decision of whether or not to take collateral for a loan depends on a number of factors, including the value of the loan and the type of assets that the borrower is willing to pledge as collateral.

Although this is not required, notarizing your Loan Agreement is an effective way to verify the signatures and identities of the parties involved in the Loan Agreement. Another option is to sign the Loan Agreement in front of a witness. In this case, the witness should be a neutral third party.

There are several steps that can be taken to enforce a Loan Agreement if the borrower defaults on payment.

These are general recommended steps and the exact steps that you should take may be different. Specifically, the way in which you enforce a Loan Agreement will often depend on the terms of the agreement and your jurisdiction. For example, the Loan Agreement may have an alternative dispute resolution clause which obligates the parties to resolve their issues through arbitration or mediation instead of going to court. Consult with a lawyer to ensure that you’re handling the breach in a way that maximizes your chances of success.

When it comes to Loan Agreements, it is best to get a lawyer involved. A lawyer will ensure that your legal needs are protected. They will raise awareness to any blind spots you may have. For example, they may recommend clauses that protect will you in ways that you would not have otherwise thought of. Or at least help you truly understand what you are getting into. Set up a free consultation to discuss your legal needs today.