Simple loan agreement
A simple loan agreement is a general form of legal document that establishes formal parameters for a loan arrangement between a lender and a borrower. In general, the simple loan agreement can apply to many different types of informal or straightforward lending as opposed to the elaborate, complex documents often prepared by large corporate lenders. Simple loan agreements can reduce legal and administrative costs, make borrowers more aware of what they have signed, and help avoid some specific issues and conflicts over the term of the loan.
Some of what defines a simple loan agreement is related to what it usually does not include. Unlike some complex loan agreements, a simple loan agreement will usually not include variable or variable interest rates. Variable or variable rate loans can leave borrowers confused by fluctuations in monthly payments. Variable interest rates may mean that a loan moves along with a low monthly service only “exploding” debt into what is called a “balloon payment.” A simple loan agreement can avoid all this with a simple fixed rate.
Another thing that simple loan agreements generally will not include is comprehensive sanctions for non-compliant payments. Some complex loans include prepayment penalties, interest fines for early payments, or other small details usually designed for the benefit of the lender financially. In a simple loan agreement, there is generally more versatility for monthly payments that apply to interest as well as the most important of a loan.
A simple loan agreement can also be written off differently than a conventional loan or mortgage loan. While loan amortization makes it easy to establish monthly payments, this type of loan tracking can actually make it harder to see how payments apply to interest and principal. Simple loan agreements will often take the path of least resistance to payment records that make the whole situation as clear as possible for both the borrower and the lender.
In many countries where unscrupulous lending companies are creating misleading offers make loan agreements complex and legally opaque, a simple loan agreement is highly sought after, not only for borrowers but for consumer lawyers and public regulatory agencies. Different nations deal with lending regulations in a variety of ways. Some regulating agencies will look at promoting a simple loan agreement as a way to effectively regulate lenders.