Lending money for interest is in most cases a profitable investment. However, like any other type of investment, it is, unfortunately, not deprived of a risk. The good news is that the risk may be substantially mitigated if adequate measures are taken in advance, including professional legal advice.
A lending agreement (loan agreement) is a formal contract between a lender and a borrower. Needless to say, that it is of utmost importance to prepare and sign a written agreement, although an oral one would still be valid. Loan agreements spell out all the aspects of the loan, such as the principal amount, interest rate, amortization period, term, fees, payment terms, and other covenants. They also outline the rights of a lender to collect payment if the borrower defaults.
To reduce the risks associated with a loan, a written lending agreement alone is usually not enough. Therefore, it is highly recommended to assure the repayment of the loan with additional security. The most common instrument to secure a loan is collateral. Collateral means assets (movable or real estate) pledged as security for repayment of a loan, to be forfeited in the event of a default.
Another common method to secure the loan is a third party’s guarantee. In this case, if a borrower defaults on payment of a loan, the guarantor becomes personally liable to a lender for the repayment of the loan. There are nuances with guarantors as well that should be taken into account, but since this topic exceeds the scope of this blog, we will cover it in a separate article.
If you need assistance with loan agreements and/or any other legal issue, please contact Buzaker Law Firm via email at info@vblegal.ca or call 905-370-0484.
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