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Bank Loans

A bank loan is an advance of a specified sum of money to an individual or a business (the borrower) by a commercial bank, saving bank, finance house or another financial institution (the lender). A bank loan is a form of credit which is of extended for a specified period of time, usually on fixed-rate term related to the base interest rate. The principle is usually repaid either on a regular installment basis or in full on the appoint redemption date. Alternatively, a bank loan may take the form of overdraft facilities under which the customers or borrowers can borrow as much money as they require up to a pre-arranged limit and are charged interest on outstanding balances.

In the case of business borrowers, bank loans are used to finance working capital requirements and are often renegotiated shortly before expiring, to provide the borrower with a revolving line of credit.

Depending upon the nature of the loan and of the degree of risk involved, bank loans may be unsecured or secured, the latter requiring the borrower to deposit with the bank collateral security (e.g. title deeds to a house) to cover against default on the loan. The lender may retain this security in the event of the default.

When a bank makes a loan, it is uncertain about whether the loan will be repaid. Low-risk borrowers default on their debts only for reasons beyond their control. High-risk borrowers take excessive risks with the money they borrow and frequently default on their loans. But banks have no sure way of knowing whether they are lending to a low-risk or high-risk borrower. Banks use various signals to distinguish between low-risk and high-risk borrowers and very often they ration or limit loans to amounts below those demanded.

In the case of individual borrowers banks use such signals as length of time in a job, ownership of a home, marital status, age.

If a firm is demanding a loan, the bank will use such signals as reliability of the firm, its credit worthiness, the purpose of the loan, the real value of the project, its recuperation period and many other factors, before it makes a decision if the loan should be provided.

Contents of Loan Agreements

Normally a loan agreement starts with a preamble, then very detailed articles of the agreement come, and finally a few annexes are given as a rule.

Among the articles of a standard loan agreement the following should be mentioned:

• amount of the loan

• use of proceeds of the loan

• disbursement

• repayment of principle

• interest, commitment charge and method of payment there of

• fees, expenses

• taxes, duties and other levies or charges

• payee and currency

• remedies

• cancellation

• particular covenants

• overdue payment

• waiver

• disclaimer

• arbitration

• evidence of authority

• collateral

• guarantee

• representations and warranties

• event of default

• assignment

• effectuation of agreement

• severability

• governing law

• language

• secrecy

• miscellaneous

As to annexes, the following can often be attached to loan agreements:

• confirmation of the loan by the lender

• letter of guarantee

• legal opinion

• amortization schedule

• disbursement procedure

• payment instructions and others.