A Brief Introduction About the Line of Credit Agreement
In life, many such situations occur where individuals have to take a loan. A relationship between the borrower and the lender is always very complicated. In Line of Credit, the borrower can utilize money whenever he requires. The interest will be applied only on the utilized money. As soon as he repays that amount, he again has an original Line of Credit to borrow from. There can be a Personal line of Credit and Business line of credit.
The agreement between a financial institute, bank, or a lender, and an individual or borrower in such a case is known as the Line of Credit Agreement. For house loans, car loans, health loans, etc. an LOC can be of enormous help. Since it allows money on demand, it puts less pressure on the borrower. It also allows flexibility for the users. Mostly personal Line of Credit is an unsecured loan, which means the borrower doesn’t have to submit any collateral as a proof for the loan. The draw period is another extreme aspect of LOC. It is as per the draw period that a borrower can take and repay the money for reuse.
Another name for the LOC Agreement is line of credit agreement form.
Who Takes the Line of Credit Agreement? – People Involved
The simple line of credit agreement can be signed between financial entity such as a bank and an individual who is in need of a loan. Both parties draft the agreement, and after reading it properly, they sign on it. This is a legally binding agreement. It also protects both parties from different unanticipated situations.
Purpose of the Line of Credit Agreement – Why Do You Need It?
Difference between line of credit and a loan is that in comparison to a regular loan, an LOC is flexible. It doesn’t put pressure on the borrower and remains fair to both parties. It is a beneficial type of loan. It can be used the way people use a credit card. It’s an easy way of taking a loan for as per your needs. Here are some more reasons why you may need the agreement –
- The agreement is required as a proof of the loan
- It protects both the parties
- It provides resolution methods
- It reduces the chances of breach, violation, and misunderstanding
- It is needed to specify the details of the loan
- To secure the amount lent by the lender
- To lay down the details of interest
- To make use of judicial closure
Contents of the Line of Credit Agreement – Inclusions
The line of credit contract template must include the basic details of the borrower and lender. Basic details include names, phone numbers, addresses, etc. It should specify the kind of LOC it is. It should have details of the entire borrowed money and draw period. It should have the details of interest rates and how they will be applied. How the repayment must be made, the agreement should answer this question. The agreement should also have details of governing laws. Each state may have different state laws. An expert’s advice on this is suggested since he can also suggest dispute resolution methods.
In summary, some important aspects of a line of credit agreement are
- Names of the parties
- Details of the parties
- Amount of credit given
- Details of the financials submitted
- Duration of credit
- The draw period
- Grace period for payment
- Amount per withdrawal
- Interest rates
- Penalties and fines
- Due dates for repayment
- Extension of credit
- Repayment schedule including minimum repayment
- Waiver of liability
- Warranties and representations
- Governing laws
- Termination of Contract
- Contact details
- Covenants
How to Draft the Line of Credit Agreement?
Line of Credit can be both secured and unsecured, but in most cases, it is unsecured. Because of which the interest rates are relatively high. It can also be Revolving Line of Credit and Non Revolving Line of Credit. In Revolving LOC, you can borrow the money, repay it, borrow it again until the draw period arrives. It is a cycle of borrowing and returning.
On the other hand, in non revolving, once the full loan amount is paid back, it can’t be borrowed again. You will have to take another loan to borrow money. Line of Credit examples is Personal Line of Credit, Home Equity Line of Credit (HELOC), Credit Card Lines of Credit, Securities-Backed Line of Credit, etc.
- Consider the financial background of the individual and assess the risk involved
- The duration of the credit period and the gain from it considering the inflation
- The rate of interest that should be charged on the loan
- The waivers of liability
- Responsibilities of paying statutory costs and the levy of penalties
- Depending on all these details, you must decide which kind of agreement you want to sign.
- You must be very specific and well aware of the differences between these different types of LOC.
Negotiation Strategy
Banks decide the interest rates and the amount of money to be given as loans depending on the credit score of an individual. If your credit score is not very strong, you can try and negotiate with the bank. This is the only scope of negotiations while drafting a LOC agreement. Negotiation strategy might not be a great tactic unless the line of credit is large. Usually banks have a fixed rule for the credit including the interest rate. This varies basing on what your credit score is.
Benefits & Drawbacks of the Line of Credit Agreement
Like all other agreements and loan agreements, a LOC also has certain benefits and certain disadvantages. Here are some pointwise advantages of LOC –
- A borrower can borrow money and pay interest on only what he draws
- After repaying the money, the borrower can again borrow from the pool of money unless the period of loan ends
- It gives the borrower freedom and flexibility
- Interest applies only on the money that the borrower withdraws
Disadvantages of LOC are –
- In most case, it is an unsecured loan
- It increases the risk of a default
- It puts pressure on financial institutes
- May have higher interest rates
What Happens in Case of Violation?
Both parties can approach the court as the agreement they sign is legally binding. In case of any default, the agreement must be referred; hence, it is suggested that the agreement anticipates all the confusion and doubts beforehand. It should be written keeping in mind the defaults. Primarily, the credit would be locked and the account maintained with the bank would be frozen
LOC is an extremely convenient way for people to take a loan from banks. Keeping its pros and cons in mind, one must draft it with the help of an expert.
Here is a sample of Line of Control Agreement pdf. Download the copy from here and customize it as per your need. This also works as Line of Credit Promissory Note.