A well-designed credit agreement means protecting yourself from many risks, both in the event of a conscientious discharge of your credit obligation and in case of force majeure. In this article, we’ll discuss what credit terms you need to look out for and how to get the most out of them. According to research, most borrowers sign a credit agreement without looking at its terms. This is not just about the well-known “fine print” notes, but also about the main points of the agreement .
State action to increase the transparency of credit conditions is not able to help if we neglect to sign this important document ourselves. It is in this case that, shortly afterwards, it appears that the credit will be issued at an increased interest rate or includes additional fees and commissions, which will painfully affect our wallet.
Credit agreement. Content and substance
A credit agreement is a document between a creditor and a borrower that the creditor gives the borrower money for use, subject to certain conditions. The law does not specify the exact content of the credit agreement, which means that each bank can change it in its own interest (attention of borrowers!). A document can only be declared invalid if it violates the law in any way.
Typically, a credit agreement contains the following simple clauses:
- Identifies the actors, ie the parties.
- The subject of the agreement, in particular the type of credit, its terms, the total amount and the terms of the loan are obligatory.
- The contract must specify in detail all the conditions for the use of the borrowed funds. The exact interest rates on the use of the credit facility, the type of repayment (fixed monthly payments or descending) are also subject to a penalty in the event of the borrower delaying the fulfillment of its credit obligations. The contract must also state the full amount of the loan (that is, taking into account all interest and charges) on the borrower.
- The credit agreement must also contain a clause specifying how the loan is to be repaid. In the event that the borrower is for any reason unable to meet its credit obligations, the bank may enforce the pledge or enforce the credit agreement, if any.
- Another mandatory clause in the credit agreement is the clause on the rights and obligations of the parties. Usually the claims are simple – the bank undertakes to provide the funds in due time and the borrower to pay the monthly payments within the specified terms. Often, it is accompanied by requirements such as the obligation of the borrower to inform the bank immediately in the event that deliberate further performance of the contractual obligation is not possible. Some banks disclaim the ability to claim the loan from the borrower ahead of schedule.
- One of the borrower’s most interesting points (which must be paid attention to) is the provision of penalties in the event of default and other situations. For example, if the borrower returns the funds early.
- And finally, at the end of each contract, you’ll find the full details of the parties.
Credit contract traps
First of all, the borrower must pay attention to the full amount of the loan. The following information is mandatory in the credit agreement. Check to see if the terms are the same as the credit product manager told you or are different. The second point to look out for is the payment arrangements – annuities or differentiated payments – carefully study the payment schedule and information on the interest rate to debt principal for each payment. The credit agreement shall contain information on the penalties applicable for late payment. Explore this question.
It is desirable for the bank to provide for a “credit holiday” (when the borrower may be temporarily prevented from making a regular payment for little or no charge). In good banks, a credit vacation can take up to two months, and in case of force majeure, this period will become your lifeline to get back on your feet and not damage your credit history. Another important point is the early repayment terms. You never know what will happen in six months.
And such a need, such as repaying one loan ahead of time and taking out a larger one on other terms, can be very useful to you. There are also points that a credit agreement may not contain (in any case, they are not desirable to the borrower) – this is about the bank’s ability to change the terms of the contract independently, such as raising the rate or demanding early repayment.
Finally, the credit agreement must stipulate that the interest on the cash is to be calculated from the date on which the cash is actually paid out, rather than earlier. Armed with this knowledge, be sure to choose a lending program and take a loan at your chosen bank!