Credit agreement – how to read? What to look for?

October 9, 2018 A loan agreement is a document that most borrowers fear. This is because it seems to them that its fulfillment is associated with enormous difficulties and devoting a large amount of time. It’s not true! In the following text we will prove that the correct completion of the loan agreement is really simple and lasts quite a short time. In addition, we will explain the commission for granting a loan, interest rate on the loan or installment, as well as describe the rights and obligations of the parties to the loan agreement. We encourage you to read! 

Credit agreement – what is it?

Credit agreement - what is it?

A loan agreement is a document that has two sides: the borrower and the lender. It is divided into two parts. The first contains the general conditions of the contract (i.e., including information on the purpose of the financial means obtained (e.g. cash loan, interest rate or general rights and obligations of the borrower and the bank).

The second part deals with the description of the individual situation of the applicant. The most important aspects of a loan agreement are the amount of financial liability owed to the bank, as well as the time schedule when the borrowed money should be repaid.

Elements of the loan agreement. Personal data, loan amount, purpose of money allocation

At the beginning of each loan agreement, the borrower’s basic personal data must be included, i.e.

  • first name and last name,
  • PESEL number,
  • registered address,
  • ID number and series.

It should be remembered that information regarding personal data should be entered in an accurate and, above all, correct way. Otherwise, we may have problems getting a financial commitment from the bank.

Another element in the loan agreement is determining the loan amount and the date when it will be repaid. This is fairly uncomplicated information to be completed if we decide to get a PLN loan. In the case of another currency, e.g. the euro, this point of the contract should be supplemented with content on this subject, i.e. the exact methods of calculating the amount of the liability, tranches as well as capital and interest installments described. It is good to know that the decision to borrow in another currency is associated with a certain risk that we may not receive all the money due to a sudden exchange rate change.

Lenders also require applicants for credit to indicate the purpose for which the money will be borrowed. For example, if we decide to obtain a mortgage, then our goal will be to finance the purchase of an apartment or building a house. This is a very important point mortgage loan, which in no way can be underestimated. Why? The reason is quite simple, in a situation where we do not achieve the goal and start spending money on something else, the bank will immediately terminate the contract.

Commission for granting a loan. An important point in the loan agreement

Every borrower should be aware that obtaining a loan usually involves a commission being charged by the bank. Of course, this issue is also included in the loan agreement. However, before determining the amount of commission, the lender will consider several of the following factors:

  • loan amount – the higher the financial liability, the lower the commission will charge us,
  • the ratio of the amount of the liability to the value of e.g. the flat being credited
  • loan amount in relation to the value of e.g. flat,
  • creditworthiness of the person applying for a loan,

Interestingly, if we decide to obtain a mortgage in order to buy property for rent, the lender may provide for a smaller commission for us.

Loan interest rate. What do you need to know about him?

It is worth knowing that the loan interest rate, which is included in the loan agreement, depends mainly on the bank’s margin, which may change in exceptional situations (e.g. when the borrower gives up additional banking products, the margin will increase). The interest rate is also affected by the changing interest rate (the change usually takes place within 3 to 6 months).

It is necessary to know that some banks offer their clients a provision in the loan agreement regarding a fixed interest rate within 2 or 5 years of repayment. Bank offers with this option can be found and compared in a special cash loan ranking.

Determining the loan installment in the loan agreement

Another element of the loan agreement relates to the loan installment. This is quite a problematic issue for borrowers, because there are several types of loan installments and each of them has quite complicated characteristics.

The first installment is the capital installment, which is only part of the financial liability and does not include additional costs.

The second is the interest installment, its amount depends on the interest rate being determined by the lender.

The third and last installment is the principal and interest installment – it is a combination of the principal and interest installment into one loan installment. In addition, this installment charges interest on the outstanding loan amount, which means that installments are smaller each month.

Signature of the loan agreement and payment of the loan

The loan agreement must contain a provision regarding the form of payment of the loan. This issue is best explained on the example of a mortgage, 7 because it is definitely more complex. This type of financial liability can be obtained in two ways: as a one-off payment or in tranches.

One-time payment of borrowed money from the bank can be obtained if you decide to buy a flat of a person who does not have a mortgage. We can receive a loan payment in tranches when we are planning to build a house. The commitment tranches are paid by the bank on the basis of regular information on the progress of construction works. The bank will pay us each subsequent installment on the basis of regular information on the progress of construction work.

When we complete all the points of the contract with a loan, it should be carefully analyzed and check whether we have not made any mistake. If all the information it contains is correct, then we can safely sign the loan agreement. In this way, the loan procedure is completed and the loan is launched.

Rights and obligations of parties to a loan agreement

Rights and obligations of parties to a loan agreement

After signing the loan agreement, the bank is obliged to:

  • transferring a specific loan amount to the borrower,
  • ensuring the borrower’s protection in case of losing creditworthiness or bankruptcy,
  • banking secrecy.

The lender also has rights and may:

  • require the lender to provide security for a financial liability (e.g. a surety),
  • ask the borrower for documents regarding the financial and economic situation and enabling control of the repayment of the liability,
  • reduce the loan amount,
  • terminate the loan agreement of the borrower if he loses his creditworthiness or ceases to meet the terms of the agreement.

The borrower also has obligations, which include:

  • repayment of a loan taken out within a specified period,
  • interest and commission repayment,
  • using the loan funds for the purpose that was included in the contract.

A person who, after signing the loan agreement, has the right to use it.

The credit counselor will explain any doubts about the credit agreement

In a situation where we do not see how to properly complete the loan agreement, we can count on the help of a credit advisor who will clarify any doubts, answer bothering questions and help to properly complete the loan agreement. Obtaining a financial commitment, which is a loan, is a serious matter, so if you do not know something, it is better to consult a specialist than to regret the wrong decision later.

Credit agreement – template

Credit agreement - template

People who intend to take out a loan usually first want to check what the loan agreement looks like and what it involves. They can do this on the internet, where there are plenty of templates for such a document and a discussion. On the websites of some banks you can also find out what the loan agreement looks like and read about all its elements.

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