7 Costly Mistakes to Avoid in Your Loan Contract Template

Taking out a loan is a big financial commitment. A well-drafted loan contract template is essential to protect your interests and ensure smooth repayment. However, many borrowers make mistakes in their loan document templates that can lead to confusion, disputes, and financial losses. In this article, we’ll highlight the 7 most common mistakes people make in their loan agreement templates and show you how to avoid them. We’ll also share tips on creating a clear, legally sound personal loan document template.

Not Specifying the Loan Amount and Purpose

One of the most fundamental mistakes in a contract template for a loan is not clearly stating the loan amount and purpose. Your loan document template must specify:

• The exact principal amount being borrowed

• The specific purpose for which the loan will be used

For example, if you’re taking a ₹5 lakh personal loan for home renovation, your agreement should state: “The Lender agrees to lend the Borrower the principal sum of ₹5,00,000 (Rupees Five Lakh only) for the purpose of renovating the Borrower’s residence at [address].”

Mistake: Vague or missing loan amount and purpose

Lender agrees to provide funds to the Borrower for personal use.

Fix: Clearly state the exact loan amount and specific purpose

Lender agrees to lend the Borrower the principal sum of ₹2,50,000 (Rupees Two Lakh Fifty Thousand only) to be used solely for the Borrower’s wedding expenses.

Overlooking the Interest Rate Clause

The interest clause is the heart of your loan agreement template. Failing to word it correctly can cost you dearly. Ensure your contract template for loan covers:

• The exact interest rate (in % per annum)

• Whether the rate is fixed or floating

• How the interest will be calculated

Example: “The loan shall carry interest at the fixed rate of 12% per annum, calculated on a reducing balance basis. The interest shall accrue from the date of loan disbursement.”

Mistake: Not specifying interest calculation method

Interest shall be charged at 11% per annum on the loan amount.

Fix: Detail the interest rate, type and calculation

The loan shall carry a fixed interest rate of 11% per annum, calculated monthly on the outstanding principal amount, using the reducing balance method.

Missing or Incomplete Repayment Terms

Your personal loan document template should contain clear repayment terms:

• The due date for each EMI

• EMI amount and number of EMIs

• Applicable late payment penalties

• Prepayment charges, if any
  Use an EMI calculator to arrive at the correct EMI amount. Assume you borrow ₹5 lakh at 12% interest for 5 years. Your EMI would be:
  EMI = ₹11,122 for 60 months

Not Defining Default and Its Consequences

Your loan agreement template must define what constitutes default and the lender’s rights in case of default. Typically, failure to pay 3 consecutive EMIs is treated as default.

The consequences can include:

• Recall the entire loan amount

• Seizure of collateral or security

• Legal action against the borrower

For instance: “Default shall have occurred if the Borrower fails to pay any 3 successive EMIs in full. In such an event, the Lender shall have the right to recall the entire outstanding loan amount and initiate legal proceedings against the Borrower for recovery.”

Skipping Dispute Resolution Provisions

Disputes can arise even with the most carefully drafted contract template for loan. Your loan document template should include a dispute resolution clause that specifies:

• Whether disputes will be resolved through arbitration or court

• The jurisdiction of courts in case of legal proceedings

• The governing law of the contract

For example: “Any disputes arising out of this agreement shall be referred to a sole arbitrator appointed with the mutual consent of the Lender and the Borrower. The arbitration shall be held in Mumbai and be subject to the Arbitration and Conciliation Act, 1996.

Failing to Secure the Loan

Depending on the loan amount, lenders may require some form of security. Your personal loan document template should clearly outline:

• The type and value of security/collateral provided

• The lender’s rights over the security in case of default

• Conditions for release of the security

Example: “The Borrower shall provide the Lender with post-dated cheques for the entire loan amount. In case of default, the Lender shall have the right to present these cheques for payment without further notice to the Borrower.”

Not Getting the Agreement Stamped and Attested

Lastly, remember that your contract template for loan is a legal document. To make it enforceable:

• Get the agreement printed on stamp paper of appropriate value

• Have both parties sign the agreement

• Ensure the signatures are witnessed by a third party

Imagine you draft a loan agreement template for lending your friend ₹2 lakh. You print it on plain paper and both of you sign without any witnesses. Later, if your friend defaults, you may find it tough to enforce the agreement legally.

Conclusion:

Creating a robust contract template for loans is crucial to avoiding financial disputes and losses. By steering clear of these 7 common mistakes, you can draft a loan document template that protects your interests and ensures smooth repayment.

When taking a personal loan, consider trusted lenders like Airtel Finance that offer attractive interest rates and easy documentation. You can download the Airtel Thanks App to check your eligibility and determine your credit score for a quick personal loan from the comfort of your home.

Remember, a carefully drafted loan agreement template is the key to a stress-free borrowing experience. Borrow wisely and repay responsibly!

FAQs:

1. What is the most common mistake people make when creating loan contract templates?
   The most common mistake is not clearly specifying the loan amount, interest rate, repayment terms, and consequences of default in the loan agreement template.

    

2. How can I ensure my loan contract template is legally sound?
   To make your contract template for loan legally enforceable, ensure it is printed on stamp paper, signed by both parties, and attested by witnesses.

    

3. What are some common mistakes related to the interest rate clause in a loan contract?
   Common mistakes include not mentioning the interest rate type (fixed/floating), calculation method (flat/reducing), and compounding frequency in the loan document template.

    

4. How can I ensure that my loan contract template is easy to understand and follow?
   Use simple language, define all technical terms, provide examples for calculations, and divide the agreement into clear sections to make your personal loan document template user-friendly.