A credit agreement is a legal contract that specifies the terms of a loan or debt. They are used in various situations, such as if you’re taking out a mortgage or an auto loan.
You want to avoid signing a credit agreement without fully understanding what it contains in it because it is a legally binding document. The contract needs to be clear and easy for both parties to understand to avoid potential disputes between them. If it’s not or there are red flags, this can lead to legal and financial risks.
Read the rest of this article to learn how to review a credit agreement so that it’s legally sound, transparent, and it protects your rights and interests.
What are Common Terms in Credit Agreements to Review?
Although the content of credit agreements can vary, they usually contain the following terms.
- Parties : the people who are involved in the agreement (ie: the borrower and lender). Their details need to be clearly and correctly specified.
- Principal : the amount being borrowed.
- Interest rate : what the lender charges for the borrower to take out the loan.
- APR (Annual Percentage Rate) : the amount owing includes the interest plus additional fees. A common misconception is that the APR is just the interest rate.
- Fees : there are various expenses, such as admin, late, and origination fees.
- Term : the duration of the agreement before the borrower needs to pay the entire debt.
- Repayment schedule : how regularly the payments need to be made, such as if they’re scheduled on a monthly basis.
- Default : missed payment or nonpayment that can obstruct the payment agreement.
- Remedies : how the lender can legally regain the debt in the case of default, such as by seizing collateral.
- Collection methods : the ways in which a lender can get the money you owe. It should include mention of the lender notifying the borrower before starting collection procedures in the case of nonpayment.
- Governing law : the jurisdiction law that rules the agreement. This is important to specify, especially if parties are in different locations.
- Dispute resolution : how the parties will handle a disagreement should one arise. This should include negotiation, mediation, and arbitration to keep disputes out of court.
What are Common Red Flags in Credit Agreements?
When reviewing a credit agreement, there are specific red flags that need to be identified and corrected. The most common include the following:
Leaving Out Sections in the Agreement
If you’re filling out a loan application and your lender tells you not to include specific information, or you notice blank areas in the document, these are bad signs that the lender isn’t trustworthy and the contract isn’t legally sound.
Unfair Clauses
Check for any clauses in the agreement that are unbalanced or one-sided, favoring the lender. This can include the right to tweak clauses without first giving the borrower notice.
There should be a termination clause so that you’re not locked into the agreement. You’ll also want to identify any acceleration clauses that give the lender the right to request full repayment under certain situations, such as if you miss one monthly payment.
Ambiguity
Anything that’s vague or unclear in the document is risky for both parties. You might not completely understand what the document clauses mean and what risks you’re taking by signing the agreement.
These clauses can also increase the chances of misunderstandings between you and the lender, as you can interpret them in different ways.
Inconsistency
If terms aren’t defined in the same way across all loan or credit agreements, this can cause issues with understanding the documents or enforcing them, leading to disputes.
Fees
The contract shouldn’t have unreasonable fees that increase how much you have to repay or fees that don’t seem to have a valid reason for why they’re included. This is why it’s essential to scrutinize the agreement, which you can do with the assistance of a reputable lawyer.
Can You Negotiate a Credit Agreement?
You can sometimes negotiate a credit agreement if the lender allows it, such as if they will renegotiate the loan terms to assist you to pay off the debt. Similarly, a bank might renegotiate a loan with a business to prevent the borrower from risking bankruptcy as a result of not paying the loan.
If you’re challenging the contract’s validity, a lawyer can help you to negotiate the credit agreement so that it’s fair and legal.
Why Do You Need to Hire a Lawyer for a Credit Agreement Review?
Although it’s always a good idea to closely read through the credit agreement before you sign it, you should ask a lawyer for their assistance. Here is how they can help you.
- Your lawyer will ensure that your contract is enforceable by law and will hold up in court, if necessary.
- They will clear up any ambiguous language that can result in disputes.
- They will check for any inconsistencies and hidden issues in the agreement, such as by ensuring all terms are consistent across credit documents.
- They have a deep understanding of all the important laws and industry standards to help you remain compliant.
- They’ll prioritize your needs and interests so that you don’t sign an unfair agreement that’s in favor of the lender.
- They’ll help you to negotiate the credit agreement so that it’s balanced and doesn’t clash with other documents.
How can you find a lawyer for a credit agreement review?
Although it can be stressful to find a reputable lawyer, it’s an easy process on ContractsCounsel, an online legal network that matches clients to vetted, experienced lawyers on the platform. They will help you review your credit agreement so that they can minimize your risks and ensure you fully understand what the document includes before you sign it.
To get a credit agreement review, head onto the ContractsCounsel platform. Post your project for free and you’ll receive multiple bids from reputable lawyers who offer top-tier service. They’re licensed to practice law in your state and are interested in your project, giving you peace of mind when signing a credit agreement.
