The negotiation and signing of contracts is a common occurrence in business. When it comes to the finance industry, understanding what a loan agreement is and the potential risks involved with signing is crucial to making informed decisions.
From negotiating initial terms to signing the final agreement, we’ve outlined a few key factors that you should consider before putting pen to paper.
Signing a loan agreement is often the final step before receiving the proceeds of a loan. The various steps that can sometimes come before this, such as negotiation of terms, valuation of security items, and legal due diligence checking, all contribute towards the content included in the final loan agreement.
Seeking independent legal advice
When a loan agreement reaches an agreed and final form, some lenders will insist that the signee receives independent legal advice on the loan agreement (commonly referred to as ‘I.L.A or ILA’). ILA is to protect an individual from signing any document before understanding the particular risks of the transaction in question. An independent advisor (usually an authorised solicitor) will sign a certificate confirming that they have provided the relevant advice, followed by the client's signature. Whilst ILA is an effective way to remove some of the risks associated with signing a loan agreement, this service does come at a cost.
If ILA isn’t required by the lender and there is a preference to proceed without it, the first consideration when reviewing a loan agreement is to ensure the agreement is in line with the previously agreed terms and conditions that have been negotiated with the lender. It’s vital to check all the conditions, including (but not limited to) the interest rate, repayment terms, and any possible penalties are identical to what has been previously agreed. This is critical, as it may be the applicant’s final opportunity to negotiate these terms or walk away from the transaction entirely. Some loan agreements do include a ‘cooling-off period’, giving the applicant the right to cancel a credit agreement after they’ve signed, only if the agreement is covered by the Consumer Credit Act 1974. After signing into the agreement, the applicant is allowed to cancel within fourteen days - often called the 'cooling off' period.
Personal guarantee
The second consideration is the effect signing a loan agreement can have on other parties, such as business partners and family members. A large majority of loan agreements carry a personally guaranteed obligation with them, which is an individual's legal promise to repay credit issued to a business for which they serve as an executive or partner. Signing into a personal guarantee means that if the business is unable to repay the loan, the individual assumes personal responsibility for the amount left outstanding. This can result in the loss of both personal and business assets, meaning people’s homes, money, and livelihoods are at risk of loss.
Therefore, it’s key to understand the potential risks of signing into the loan agreement and budget realistically for any repayments you may have to make.
Always read the instructions
A final consideration is to ensure you are signing the loan agreement in line with the specific instructions provided by the lender.
A signature will typically have to be witnessed - despite there being no legal requirement for a signature to be witnessed! The purpose of signature witnessing is to prevent fraud and ensure that the signatory is fully aware of the legal consequences of the document they are signing. A witness can be anyone over the age of eighteen with no personal interest in the signed document and is competent to testify in court.
Sometimes, the signed agreement needs to be left undated. This is because documents must be dated on the day of completion, and in anticipation of mishaps and to prevent loan agreements from being signed multiple times, solicitors will typically hold signed documents until the day of completion, to which they will then date the documents subject to the signee’s approval.
Finally, it is possible to sign a loan agreement either physically (wet/ink) or digitally (using a platform such as DocuSign). While most lenders now accept documents signed in both formats, it is worth checking this with the lender before signing.
Summary of key considerations:
Seek third-party professional advice (ILA)
Make sure you read the fine print before signing - Check and understand all terms and conditions that apply to the loan agreement
Understand the risks associated with yourself and other parties before signing
Ensure you are signing in accordance with the lender's instructions
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