When reviewing a loan agreement, it’s essential to pay close attention to key terms that define the rights, obligations, and risks for both the lender and the borrower. Here are the key terms to consider:
1. Loan Amount and Disbursement Terms
- Clearly state the principal amount being lent.
- Check how and when the loan funds will be disbursed.
- Look out for conditions precedent (e.g., documents to be provided before disbursement).
2. Interest Rate and Fees
- Confirm the interest rate type: fixed, floating, or variable.
- Watch for additional fees: arrangement fees, commitment fees, late payment penalties, etc.
- Understand how interest is calculated (e.g., daily, monthly, annually).
3. Repayment Terms
- Review the repayment schedule: periodic payments, bullet payments, grace periods, etc.
- Check if early repayment is allowed and whether any prepayment penalties apply.
- Understand the currency and method of repayment.
4. Security/Collateral
- Identify whether the loan is secured or unsecured.
- If secured, confirm the nature of the collateral (real estate, movable assets, shares, etc.).
- Check for any charges, liens, or rights over the assets provided as security.
5. Covenants
- Positive covenants: Obligations the borrower agrees to do (e.g., maintain insurance).
- Negative covenants: Restrictions (e.g., no additional borrowing, no asset disposal).
- Failure to comply can trigger a default.
6. Events of Default
- Clearly understand what constitutes a default (e.g., missed payments, insolvency).
- Review the grace period, if any, before a default is enforced.
- Know the lender’s remedies in case of default (e.g., demand immediate repayment, enforce security).
7. Governing Law and Jurisdiction
- Confirm the legal system governing the agreement.
- Determine where disputes will be resolved (e.g., courts or arbitration, and which location).
8. Representations and Warranties
- Statements made by the borrower regarding their legal capacity, financial condition, and ownership of collateral.
- Inaccuracies can give the lender grounds to terminate or call in the loan.
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