Personal Loan Agreements: Know the Terms and Conditions

What is a Personal Loan Agreement?

A loan agreement is a binding contract between the borrower and lender to formalise the loan process and spell out the loan schedule and terms associated with the loan amount, interest rate, repayment terms, due dates, etc. Depending on the loan amount and purpose, a loan agreement form may range from a relatively simple letter with basic loan details to an elaborate document consisting of intricate details. Regardless of the agreement type, the judiciary guidelines govern it to ensure the loan terms are legal and reasonable. 

Importance of a Loan Agreement

Agreements are helpful for both the lenders like us and borrowers like you for various reasons. It is a legally binding document that protects the interests of both parties if one fails to honour the other party's rights. It helps lenders in the following ways:

• It legally binds you to repay the loan at a fixed interest rate within the selected repayment term.
• It enables lenders to take legal action in case you fail to repay or default on the loan.

You, as a borrower, can benefit from a Personal Loan agreement in the following ways:

• It provides clear Personal Loan terms and details, including the interest rates, repayment periods, EMIs, due dates, etc.
• It helps you keep track of your payments and calculate the outstanding balance.

When is a Loan Agreement Useful?

Generally speaking, a loan agreement is beneficial every time you borrow money. It formalises the application, approval, disbursal, and repayment terms, producing positive impressions and results for both parties. A loan agreement is helpful not only while borrowing a Personal Loan from Hero FinCorp but also in the following situations:

 

• When taking a private or Personal Loan from relatives or friends
• When financing a major purchase like a vehicle or a gadget
• When taking a student loan
• When borrowing a Business Loan 
• When taking a mortgage loan against real estate

Personal Loan Terms and Conditions That an Agreement Should Include

A loan agreement typically includes crucial details about a loan transaction, including the following:

• Loan Amount: It is the amount of money you receive from the lender. In the case of a Personal Loan pre-approval, you already know the loan amount you can borrow from the lender. In other cases, you must check your eligibility to decide on a loan amount to apply for. 

• Interest Rate: Loan providers charge Personal Loan interest rates for their service of lending money when you need it. Usually, it is a percentage of the principal loan amount you borrow, which they add to the borrowed amount for repayment. Loan companies set the interest rate before signing the agreement, which usually remains fixed during the tenure.  

• Contract Length: The contract length usually depends on the loan’s amortisation schedule. It determines your monthly EMIs by dividing the principal and interest amounts into the number the EMIs during the loan term. 

• Payment Method: It is the method you will use to repay the loan. It can be any of the following ways:
  • Regular payments to pay over a specific period
  • Regular payments to pay specifically towards the Personal Loan interest (depending on a case-to-case basis)
  • Regular payments to pay towards the principal and interest 

• Repayment Schedule: Most Personal Loan plans have flexible repayment schedules you can select according to your repayment capacity using an EMI calculator. The loan agreement outlines this repayment schedule, which you can refer to later to repay the EMIs on time. 

• Additional Charges: The agreement explains the action the lender can take if you fail to repay the loan according to the promised schedule. The agreement will mention all the applicable charges you are legally required to pay. For instance, if you pay an EMI late, the lender will see it as a breach of contract and charge a late payment penalty

• Lender and Borrower Details: The loan agreement will include all the details regarding the parties, including their names, contact details, Aadhaar and PAN card numbers, etc. 

Important Legal Terminology You Will Find in a Loan Agreement

Before signing a Personal Loan agreement, you must understand the standard legal terminology used in the document. These are a few essential terms you must know:

• Outstanding Balance: The term refers to any sum currently payable and outstanding to the lender. Simply put, it is the amount you owe the loan provider, including the applicable interest, principal amount, and other charges. 

• Due Date: It is the date by which you must pay the lender. A due date could be the deadline to pay the EMIs, additional charges and costs, and interest amounts. 

• Penal Interest: If you fail to pay the outstanding dues or EMIs by the due date, you will need to pay penal interest.

Familiarise yourself with the loan agreement thoroughly to properly understand the Personal Loan terms and conditions. It is best to obtain a legally binding contract and read it thoroughly to know the transaction details. When you avail of a Personal Loan from Hero FinCorp, you get an all-inclusive loan agreement to help you understand the terms, eliminating confusion. 

Things To Keep In Mind for Personal Loan Agreement

Remember to review the loan agreement carefully and contact customer support if needed to ensure a comprehensive understanding of the terms and conditions. Here we have panned out a few important things.

Eligibility:

While applying for a new loan it is important to find out beforehand whether you meet the eligibility criteria. This includes age, income, credit score, and employment status. Checking off all these increases your chances of loan approval.

Documents:

Now, the next thing you need to be careful about is the documents involved, such as identification proof, address proof, income proof. To complete the loan application process smoothly, you’ll require these documents.

Utilisation:

Personal Loans are one of those loans which gives flexibility in usage. But you do need to understand any specific restrictions on loan utilisation outlined in the agreement. This way you can avoid violating lenders terms.

Interest Rate:

Thoroughly reviewing the interest rate is necessary, as it directly impacts your loan cost. Confirm with the lender whether it is fixed or variable and understand the implications.

Duration:

Take note of the loan tenure mentioned in the agreement, the maximum tenure allowed is five years. Understanding the repayment period will help you plan your finances and ensure timely repayment of your loan.

Part-Payment:

Check if the agreement allows part-payment and are there any charges or conditions associated with it. Understanding this option can help you manage your loan effectively. Suppose in case you encounter any bonus, you can use that money to reduce your loan burden and save on the interest payable.

Missed Payments:

Familiarising yourself with the consequences of missed payments is important, and this includes late payment penalties, increased interest rates, and potential damage to your credit score. When a loan remains unpaid for a longer period, the credit score starts reducing and the debt keeps on increasing.

Other Charges:

Be aware of any additional charges mentioned in the agreement, such as processing fees, prepayment penalties, or charges for documentation or loan restructuring. Because when you are aware of these, you’ll know what’s coming your way.

Co-Applicant and Guarantor:

If applicable, understand the obligations and responsibilities your co-applicant or guarantor has for the loan. Ensure all parties involved are aware of their roles and liabilities.

Consequences of Default on Personal Loan Agreements

Defaulting on a Personal Loan can have the following consequences: 

• It can lead to legal actions and damage your creditworthiness
• You may have to pay penalties and higher interest rates for missed payments
• Your credit score will suffer, making it challenging to secure any loans later in life

So it is essential to meet your loan obligations, communicate with the lender in case of financial difficulties, and explore alternatives like loan restructuring or repayment plans to avoid defaulting. 

Conclusion

FAQs: 

1. What is stamp duty for Personal Loan agreement?

Stamp duty for a Personal Loan agreement varies by state and a nominal fee is paid to the government to make the agreement legally enforceable.
 

2. What is the rule of 78 on Personal Loans?

 The Rule of 78 is a method used to calculate prepayment penalties on Personal Loans. It allocates more interest in the early stages of the loan term.

3. Can I withdraw money from Flexi loan?

Yes, with a Flexi loan, you can withdraw money up to the approved limit as per your convenience and repay it within the agreed repayment terms.