A Brief Introduction About the Repayment Agreement
What is a Repayment Agreement?
Any amount borrowed with an intention to be repaid after a fixed duration with a fixed rate of interest is a loan. An agreement entered into between two parties for such a transaction is known as a repayment agreement. The primary inclusion in the agreement is a repayment schedule that highlights the timelines and amounts of the repayments and the effects in case of any delays or violations in the general terms of the agreement.
The mode and methods of repayment are fixed in the agreement and are agreed upon by both parties in advance.
Who Takes the Repayment Agreement? – People Involved
The agreement is executed between the borrower and the lender of the sum of money. This may be between organizations, individuals, or both.
At times, employees also take loans from their employers. These are taken as salary advances and are repaid in installments from future salaries of the employee. Such an arrangement between an employee and employee is recorded in an employee repayment loan agreement.
Purpose of the Repayment Agreement – Why Do You Need It?
The agreement is entered into by parties involved in the lending and borrowing of a sum of money. The terms and conditions of such transactions are highlighted in the agreement.
In addition to providing protection to its parties and provide resolutions for any disputes that may arise, the main purpose of the agreement is to list out, in detail, the terms of the arrangement. This includes the amount being lent, and the interest levied, the purpose for which the loan amount can be used, and the repayment schedules, including the amount to be repaid and its installments. Both parties agree to the same terms and make inclusions that protect themselves in the event of any disagreements.
Contents of the Repayment Agreement – Inclusions
Since the main objective of the agreement is to document the terms of the arrangement in detail, the following must be included in the agreement:
- The details of both parties concerned, including their names, addresses, and their role in the agreement.
- The amount of the loan or the principal amount and the interest rate.
- The duration of the loan.
- The details of any security associated with the loan as a loan repayment guarantee from the borrower.
- The repayment schedule including the amount to be repaid, dates of repayment, and the breakup of the principal and interest amount being repaid. You can download a debt payment plan template from here.
- The conditions and effects and charges involved in the event of any early repayments of the loan.
- The rights and obligations of the parties of the loan.
- The resolution measures for disputes.
How to Draft a Repayment Agreement?
The parties generally have varying priorities. For instance, the lender looks to earn interest while the borrower looks for financial assistance. Keeping this in mind, the following must be taken care of when drafting the agreement:
- The agreement must be as comprehensive and conclusive as possible. All terms and conditions, as well as the obligations, must be clearly stated in the agreement and agreed upon by both parties.
- In order to avoid litigation, a comprehensive plan for conflict resolutions must be laid out, providing for the common defaults such as late payments.
- The measures to be taken in case of early repayments or any renegotiation must also be included in the agreement.
Negotiation Strategy
When negotiating the terms of the agreement, it is important to keep in mind that it should be fair to both parties. It should provide sufficient time for the borrower to gather finances to make the repayments, and the interest amount on loan should be fair to the lender. It should compensate the lender for the risk that he assumes and also give him the interest that he would earn in the market.
Benefits & Drawbacks of a Repayment Agreement
The important benefits that the agreement provides are as follows:
- A formal, written proof of the terms of the arrangement that enables the parties to have a common understanding and ability to plan for the finances,
- Protection to the parties against any disputes in terms of the loan, and
- Resolution measures to remedy any disputes.
On the other hand, the agreement has certain disadvantages:
- It makes the terms of the loan less flexible and creates a cumbersome process to make modifications,
- Takes considerable time and money to draft, and
- If not drafted properly, it does not provide the benefits.
What Happens in Case of Violation?
In the event of any defaults, the agreement is referred, and the remedies stated therein are considered.
Also, there is generally a scope included for the borrower to explain himself. It can be done through a repayment agreement letter where the borrower states the reasons for his inability to make the payment or the reasons for the violation and seeks redressal from the lender. You can download a loan repayment letter sample from here.
Further, in the case where the violation cannot be remedied between the parties, they can sort to external arbitration or litigation(1).
The agreement is an essential document that is legally binding on both parties. It presents as proof of the loan and provides a catalog of its important dates and repayments.
Overall, it is better to execute the agreement to instill a common understanding between the parties and to help them plan their finances.