What Are Loan Documents? Common Types & Provisions

Understanding Loan Documents

Loan documents formalize the lending relationship between a borrower and a lender. These legally binding agreements outline the terms and conditions for funds, detailing the rights and responsibilities of all parties. They provide borrowers with a clear understanding of their obligations, including the amount borrowed and repayment schedule. For lenders, they assure fund recovery and specify remedies for non-compliance.

Regardless of the loan type, every set of loan documents will clearly identify the parties, including the borrower, the lender, and any guarantors who pledge to repay the debt if the primary borrower defaults. Beyond identifying the parties, loan documents universally specify the principal amount of the loan, which is the original sum of money advanced. They also detail the interest rate applied to that principal, determining the cost of borrowing. The loan term, or the duration over which the loan is to be repaid, is precisely stated, often alongside a comprehensive repayment schedule. This schedule typically outlines the frequency and amount of each payment.

Common Provisions in Loan Agreements

Loan agreements include legal provisions governing the loan’s operational aspects. Representations and warranties are borrower statements affirming certain conditions are true when the loan is executed. These include assertions about financial health, legal standing, or absence of undisclosed liabilities. Breaching a representation or warranty can lead to a default.

Covenants are borrower promises to perform or refrain from certain actions throughout the loan term. Affirmative covenants might require maintaining insurance, providing financial statements, or adhering to financial ratios. Negative covenants could prohibit incurring additional debt or selling specific assets without lender consent. These provisions safeguard the lender’s interest and ensure the borrower’s continued ability to repay.

Events of default define circumstances where a borrower breaches the loan agreement, triggering lender action. The most common is failure to make timely payments. Other events include bankruptcy, material breaches of covenants, or misrepresentations. The agreement specifies a grace period for certain defaults, allowing the borrower time to cure the issue before formal actions are initiated.

Upon an event of default, the loan agreement outlines lender remedies. These can include accelerating the loan, making the entire outstanding balance immediately due. Lenders may also seize and sell collateral, if secured, to recover debt. The agreement specifies the governing law. Assignment clauses permit the lender to transfer its rights and obligations to another party, common in the secondary loan market.

Prepayment penalties are common, particularly in commercial loans or certain mortgages. These clauses require an additional fee if the loan is repaid in full before its scheduled maturity. This compensates the lender for lost anticipated interest income. The specific amount or calculation method is defined within the loan agreement.

Specific Types of Loan Documents

The Promissory Note is a fundamental loan document, serving as the borrower’s written promise to repay a specific sum to the lender. It details the principal amount, interest rate, payment terms, and maturity date, acting as primary evidence of the debt. This document is typically unsecured, relying solely on the borrower’s commitment to pay.

For loans secured by real estate, a Mortgage or Deed of Trust is executed alongside the Promissory Note. These documents grant the lender a security interest in the borrower’s real property, allowing foreclosure if the borrower defaults. A Mortgage involves two parties, while a Deed of Trust involves three: the borrower, the lender, and a trustee who holds legal title until the loan is repaid. Both secure the debt with real property.

When a loan is secured by personal property, such as equipment, inventory, or accounts receivable, a Security Agreement is used. This document creates a lien on specific movable assets, giving the lender the right to repossess and sell those assets if the borrower fails to meet obligations. The security interest is often perfected by filing a Uniform Commercial Code (UCC) financing statement, providing public notice of the lender’s claim.

A Guaranty Agreement involves a third party, the guarantor, who promises to repay the loan if the primary borrower defaults. This provides additional security for the lender, especially when borrower creditworthiness is a concern. The guarantor’s liability can be limited or unlimited, and the agreement specifies conditions under which the obligation is triggered. This document is distinct from the Promissory Note, creating a separate, contingent obligation.

Truth-in-Lending Disclosures are documents required by federal law, providing consumers clear information about the cost of credit. These disclosures present key financial terms, such as the Annual Percentage Rate (APR), finance charge, amount financed, and total payments. Their purpose is to enable borrowers to compare loan offers. These disclosures ensure transparency in credit transactions.