Loan Agreement
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Loan Agreement
A Loan Agreement is written evidence of a loan between individual persons or entities, such as partnerships and corporations. It contains the amount of the debt and the terms and conditions of the loan. In this loan agreement, the person or entity lending the money will be called the creditor while the person or entity borrowing the money will be called the debtor.
Some conditions in the loan that may be included are:
- Interest and penalty rate. A condition for the payment of interest and the penalty rate mustbe inwriting.
- Security. In order to be binding against third persons (i.e. persons who are not a party to the loan agreement), the condition for security must be in writing and must follow certain conditions described below. In order to use a property as security, the debtor must be the absolute owner of the property and they must have free disposal of the property or that they are legally authorized to use the property as security. If the property is part of the conjugal property of the debtor and their spouse, the spouse must also give their consent to use the property as security. Below are general ways that a property can be used as security:
- Personal property as security - personal property that will be used as security is generally all things that are not immovable property (i.e. land).
- Security Agreement. A security agreement is a contract creating a security interest over personal property to secure the obligation of the debtor in favor of the creditor. The property must be described in a manner that will enable the parties of the security agreement, or any other person, to identify the same after reasonable inquiry and investigation. To properly execute a property right over the personal property, a notice must be registered before the Philippine Personal Property Security Registry (PPSR).
Immovable property as security
- Real Estate Mortgage. A real estate mortgage is a contract when an immovable property (such as land) is used as security for the payment of the loan. To bind third persons, the real estate mortgage must be notarized and registered in the Registry of Deeds.
How to use this document
This Agreement sets out all the terms and conditions of the loan including the personal details of the creditor and the debtor (such as their names, nationalities, civil status, and address), the amount of money being borrowed, and the manner of payment of the loan, and the signature of the parties. If a representative will sign for any of the parties, the representative must present a Special Power of Attorney to enter into the Loan Agreement on behalf of said party.
If there is more than one creditor or debtor:
- If there is more than one creditor, the user must choose whether a creditor can demand payment for:
- the amount that he lentto the debtor - If a creditor can only demand payment for the amount that he lent, the user will be asked to fill in the amounts that each creditor can claim from the debtor.
- Example: if the creditors lent P1,000.00 to be financed as follows: Creditor A: P500.00, Creditor B: P300.00, and Creditor C: P200.00. Creditor A can only demand payment for the amount that he lent, in this case, P500.00. The same goes for Creditors B and C.
the full amount of the loan - The creditor who receives the full amount shall be liable to repay the other creditors the amounts that they lent to the debtor.
- Example: Using the above example, Creditor A can demand payment of P1,000.00. However, if he receives the same, he should pay Creditor B: P300.00 and Creditor C: P200.00. The same applies to Creditors B and C if they should be the ones to demand and receive payment for the full amount of the loan.
If there is more than one debtor, the user must also choose whether the creditor can demand the debtor to pay:
- only the portion that he promised to pay - If the creditor can only demand that a debtor pay a specific portion, the user will be asked to fill in the amounts that each debtor will pay to the creditor.
- Example: If the creditor lent P1,000.00 to the debtors to be paid as follows: Debtor A: P750.00, Debtor B: P150.00, and Debtor C: P100.00. Debtor A will only be required to pay the amount stated, in this case, P750.00. The same goes for Debtors B and C. The debtors cannot be required to pay more than the amount they promised.
the full amount of the loan - The debtor who pays the full amount can ask the other debtors to repay him for their specific portion.
- Example: Using the example above, the creditor can demand payment of the full amount from Debtor A, in this case, P1,000.00. If the full amount is paid by Debtor A, Debtor A can ask for reimbursement for Debtors B and C in the amounts provided above. The same goes for Debtors B and C.
The user can choose whether the payment of the loan will be in a lump sum (the whole amount and interest to be paid on one date) or in installments. If the user chooses installment payments, the user can choose whether the installments will be paid in equal amounts until the full amount is paid or equal amounts with a lump sum at the end (e.g. 80% will be in equal installments and the last 20% will be paid in lump sum).
If the loan is secured, as discussed above, the document also includes an Affidavit of Good Faith, which the parties will also have to sign in the presence of a notary public, and an Acknowledgment and Certification of Oath for the notary public.
If the loan is not secured, the user has the option to include an Acknowledgment in order to convert the document into a public document. If a document is a public document, it becomes self-authenticating and requires no further authentication to be presented in court as evidence.
Once completed, the document should be printed for each creditor and debtor (one copy for each party). The parties must review the document carefully and sign the same. If the document will be notarized, the parties must personally go before a notary public with competent proof of identification and acknowledge the loan agreement. If the document includes an Affidavit of Good Faith, the parties must sign the same in front of the notary public.
Applicable Law
There are a number of special laws that affect loan agreements, however, general law for loan agreements can be found in the Civil Code of the Philippines. Additionally, to properly secure a loan agreement by Personal Property, the provision of the R.A. 11057 or the Personal Property Security Act should be complied with.
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Guides to help you
- What to do after Creating a Contract?
- When and how to Notarize a Document?
Other names for the document: Loan Contract, Mortgage Agreement, Real Estate Mortgage Contract, Agreement to Lend Money, Lending Agreement
Country: Philippines
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