Things to Include or Leave Out of Your Loan Agreements

Whether you are lending money to someone as a favor, or whether lending is an essential part of your business, your lending agreement may be the difference between getting paid back, or being out a lot of money, unable to collect. But you may be surprised at how many important things people leave out of loan agreements—or how many things they put in which shouldn’t be there.

Don’t Include Compound Interest

Yes, compound interest can be a great way to make money on your money. And, the threat of compound interest can convince someone to pay. But the problem is that you can easily run into usury problems, and avoiding usury with compound interest takes some complex math.

The court takes all of the interest someone must pay and then divides it to get an effective APR to see if that APR exceeds the legal usury limit. So when you charge compound interest, you can end up with a usurious loan without even knowing it.

Do Include a Non Waiver Clause

Want to be a bit flexible if the other side needs some accommodations in paying back the loan? Think you may need to make some alterations to the loan contract? You don’t want to waive your rights to collect or how you collect.

A non-waiver clause will say that should you agree to overlook a part or provision of your agreement, you can still enforce the agreement—for example, your choice to allow, say, a late payment, hasn’t altered your rights to demand timely payment in the future.

Do Include an Acceleration Clause

Certainly, you don’t want to make life difficult for your borrower, who you imagine, can’t pay the entirety of the loan back at one time. But there are times when you may want to call in the entirety of the loan. What if the business loses its owner, or if the CEO changes hands, or there is some alteration in the business structure of your borrower? What if the borrower company moves its headquarters out of state?

You have the right to say that you can demand acceleration, on the occurrence of whatever stated events you want to include.

Do Allow Yourself to Transfer the Loan

What if you no longer want to collect on the loan, but want to sell your rights to collect to someone else? To avoid problems, it’s best to put in a provision, where the borrower agrees that you have the right to sell and transfer the loan—and that all the provisions of the loan agreement go with the transfer.

Notice provisions? Maybe

Many loan contracts say that the lender (you) will give notice to your borrower, that the borrower has defaulted on a payment, or that the borrower has missed a payment. That can be helpful to the borrower, and perhaps, get the borrower paying before you have to start a legal action.

But if you do include that, you will have to give the actual notice—and if it is defective, or doesn’t say what it is supposed to say, or you can’t prove you sent it, you could have a problem collecting.

Call the West Palm Beach business litigation lawyers at Pike & Lustig today to help you with your loan, and your business contracts.

Sources:

leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699%2F0687%2FSections%2F0687.02.html

investopedia.com/terms/a/acceleration-clause.asp#:~:text=What%20Is%20an%20Acceleration%20Clause,repayment%20and%20the%20repayment%20required.