A loan agreement is a pretty complex document that can fully protect both parties involved in the transaction. A lender will usually be responsible for creating the document which means they are responsible for including relevant terms and conditions.
Due to many legal obligations, entering into a loan is a significant financial commitment for any borrower.
If you’re planning to get Cash advances or would like a personal loan to get you through a particularly tough period, there are a couple of things you need to consider in terms of the legal requirements of a loan.
What Is A Loan?
A loan is a type of credit that is lent to another party in exchange for future repayment of the value amount. Depending on the situation, the lender might add finance charges or interest to this principal value which must be paid on top of the borrowed amount.
Loans may be an open-ended line of credit or may be available as a specific, one-time amount of money. Again, it depends on the situation and the lender.
The Purpose Of A Loan
There are many types of loans out there to choose from, meaning you can easily find one that best suits your specific situation. However, there are a few general reasons why people take out a loan. We’ve included the most common ones below.
● Cover the cost of a wedding or a dream holiday
● Pay for a car
● Consolidate debt
● Home repair and/or improvements
● Emergency expenses
● Improve credit score
Remember: you should never lie to your lender about the intended use of the loan as it might violate their terms and agreements and void your legal transaction.
Applying For A Loan
Every lender will have their application to begin the process of getting a loan. If you are borrowing from an online lender, you’ll likely be completing your entire application online. A traditional application from a credit union or a bank can be done online or in person.
The application process is pretty straightforward and will often ask for personal information in addition to your income.
Legal Documents Your Lender May Need Before Approving A Loan
Having a loan will not automatically fix or improve your financial situation as many factors must be considered. This includes the fixed repayment timeline and any added interest that the lender has specified.
But before you reach this point, your application must be accepted. Here are the main documents you’ll need if you want to apply for a loan.
Proof of Identity
Aside from more obvious reasons such as identity theft, a lender must have the means to verify your identity to make sure you are the right age and legally eligible to apply for and receive a loan.
You will usually need to present two forms of legal documentation proving your identity, including:
● Driver’s license
● Citizenship certificate
● Birth certificate
● Passport
● Military ID
● Social Security card
● Individual Taxpayer Identification Number (ITIN)
Proof of Address
This provides evidence of your living situation, helping a lender to evaluate how stable your lifestyle truly is. Fortunately, there are a couple of different ways to prove your address. We have listed these below.
● Proof of home, vehicle, or rental insurance
● Bank statement
● Credit card statement
● Utility bill
● Mortgage statement
● Rental or lease agreement
Income and Employer Verification
Another legal requirement to receive a loan is proof of employment and income. If you do not have any of these documents, you are increasing the risk of the lender as they will be unsure about whether you can afford to repay the loan amount or not.
You can usually use the following documents to verify your income with a prospective lender:
● Bank statement
● Pay stub
● Tax returns
● Employer’s contact details
Credit Score
A loan lender will also need to have solid evidence of the borrower’s credit score.
After you begin the process of applying for a loan, the lender will do a hard search of your credit score which will have a direct impact on your credit score. Some lenders will only lend money to borrowers that have high credit scores whereas others are a bit more lenient and willing to take a chance on people with lower credit scores.
Legally, lenders usually ask borrowers to have a credit score of around 550 to receive a loan. Yet some lenders are willing to reconsider.
Vital Legal Clauses In A Loan Agreement
● Term of Loan: A key legal requirement of a loan is the repayment term or the time frame that a specific amount must be repaid. Borrowers and lenders must work together to establish key dates. Ideally, the repayment period will be 5 and a half years or less so that the debt isn’t statute-barred.
● Amount That Will Be Loaned: The amount being loaned must be specified in a loan agreement. This helps to avoid any potential error or doubt in the future. It also holds both parties accountable for ensuring that all repayments are made on time.
● Dates: Make sure that the dates of the loan transaction including when the amount will be transferred and when the loan agreement will begin are noted. Again, this prevents any legal issues further down the road.
● Involved Parties: Note the full name, address, and contact information of the borrower and the lender. If multiple parties are involved, ensure all relevant information is noted down.
Summary
When you take out a loan, there are many legal requirements that you need to think about in addition to the amount you want to borrow and the reason you want to borrow the money.
This article highlights the main legal requirements lenders and borrowers must consider when it comes to a loan. We hope you now understand a little more about the legal side of the process!
