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When someone needs to take a loan from a bank or any other person or entity, there needs to be a loan agreement drafted which contains evidence and formal statements and conditions regarding the loan. It should contain the type of loan being issues, the amount, any conditions regarding the payback and the period pay loan pay back with any consequences if failure to pay back the loan.
As a result, when a loan is being issued, this loan agreement has to be structured in a certain way. The terms and conditions of the loan need to be set up by the lender which is the bank, any financial institution or an individual. The loan thus represents a “convenience” of sorts that is being offered by the lender and the loan is structured in the following four steps/sections,
Section One: This section contains all the terms that are to be used in the loan agreement and what are their definitions and in what context will they be used.
Section Two: This section is concerned with amount of the loan being taken, in other words, it is concerned with any operational terms of the agreement. This is the section of the structured loan agreement that interests the borrower’s financial agents particularly.
Section Three: This section of the structured loan agreement is dives in to the specifics of the loan agreement. It contains the responsibilities of the lender and the borrower. It also discusses the measures which would be taken if the borrower is unable, for any reasons, to pay back the loan in the set period of time. Moreover, this part of the agreement also contains information on the extent that changes can be made to this structured loan agreement in case of any concern that may come up. In a nutshell, this is an important section of the entire agreement and is only chalked up after detailed negotiations between the lender and the borrower and their financial advisors.
Section Four: This sections contains other relevant information regarding the agreement including further contract information and the formal relationship that may exist between the financial parties – something that is important to consider in the case of having more than one lender and multiple laws that may apply to the agreement.
Loan agreements are structured in two ways – according to the type of lender or according to the type of facility. There may be bilateral loans or syndicated loans. Syndicated loans are carried out by more than one lender and their financial details, structure and administration are handle by one or many banks. Often, the lending banks are also known as arrangers.
Apart from standard loans, bound by the formal loan agreement structure, there are also other types of loans such as demand loans. These are short loans with a set payback period of 180 days. However, a loan agreement remains an integral component to secure loans as it establishes a formal relationship between the lending and borrowing parties.