The over excitement of being told that your loan has been approved often leads you to forget going through the actual loan agreement. This is not only dangerous but irresponsible. A loan agreement is a legally binding contract with clear obligations that are expected of each party. The terms and conditions therein are very important. Zimbabwean law uses what is called the caveat subscriptor rule; if you sign for something it is assumed you read it and agreed to it. Because of this, loan agreements need to be read carefully and understood. In this article, we explore some of the terms, conditions and rights which are in a loan agreement according to the Reserve Bank of Zimbabwe (RBZ) guidelines which you can download by clicking here.
What to look out for
From the onset, there is need to look out for a number of things in your agreement. The borrower should check for applicable charges and whether interest is charged weekly, monthly or annually. Borrowers must also check if the interest is fixed or floating, compounded or simple. As a borrower, you must also find out if charges are once off or continuous. It is also advisable to check the penalties levied on late payments and whether there is a fee charged for early repayment. Given that most agreements are written in complicated language, it may be wise to ask for a copy of the agreement and have it explained to you by someone independent so that you understand it better before signing it.
Loan agreements normally contain what are called conditions precedent. Essentially, these are conditions that must be met before the loan agreement takes effect. Conditions precedent may include submission of certain documents, inspection of buildings and so forth.
A loan agreement normally specifies the manner in which loan funds are to be disbursed to the borrower. This may include the period for and number of disbursements. Some loans are not given to you all at once. They are paid in bits and pieces. You need to check and be sure of this.
Also called early repayment, this clause talks about whether the borrower may repay the loan at any time or not. Some loans specifically prohibit prepayment although it is always advisable for the borrower to negotiate the right to prepay a loan. Some lenders may ask the borrower to pay a fee if they want to repay their loan early. This compensates the lender on the foregone interest which they are going to lose because of accelerated repayment.
Loans usually carry interest. This can either be fixed or floating. A fixed interest rate is one that remains the same over the loan tenure. On the other hand, a floating rate is variable or adjustable. It can change due to inflation or other factors. As a borrower, you need to be sure of these issues before signing a loan agreement.
Interest on late payments
Some loan agreements specify the interest the borrower is required to pay on overdue payments. This is meant to encourage borrowers to pay on time and also compensate the lender for the additional risk and administrative expenses.
Fees are meant to give the lender additional compensation for arranging and maintaining the loan. These fees may include insurance and prepayment fees. It is important to note that upfront fees cannot be recouped even if the loan is accelerated or prepaid shortly after it is drawn.
The asset disposal clause is meant to restrict the sale, lease or disposal of the borrower’s assets or business. Any disposal of loan collateral should be according to certain processes which may include a writ of execution from the High Court. The thinking is that, since the lender is holding onto your house as security for a loan for example, if you sell it before paying off the loan, the lender may lose out in the event that you fail to repay the loan.
Disputes may arise when one or both parties flout provisions of a loan agreement. Luckily, there are dispute resolution procedures which can be followed if this happens. Firstly, the RBZ requires every microfinance institution to have internal complaints procedures. So, whenever, there is a complaint, internal remedies are sought. If the institution fails to address the complaint, the RBZ can step in and assist accordingly. Secondly, there are civil remedies and courts which can also be pursued in case of disputes.
Class actions can also be used to settle disputes. This is where individuals come together to lay a complaint against one common defendant. This is ideal in cases where individuals have lost small amounts of money and may not be willing to carry the burden and costs of legal action alone. As a group, they then share the costs. Alternative dispute resolution mechanisms like mediation and arbitration can also be used. The choice of which route to take may depend on provisions of your agreement.
The above are important pointers when entering into a loan agreement. Not reading and understanding a loan agreement which you sign is not a viable excuse when things go wrong. You need to know what you are getting yourself into.