Loan Agreements
- 17 December 2019
- Posts
- Loan Agreements
  TABLE OF CONTENTS
A loan agreement is a contract between two or more parties in which at last one party (the lender) agrees to provide a loan to at least one other party (the borrower).
There are typically two main types of loans:
- Secured loans such as home loans and most commercial facilities; and
- Unsecured loans such as personal loans and credit cards.
It is usual for a secured loan to be considerably cheaper in terms of interest rates because of a lesser risk to the lender that part of all of their capital will be lost. The loan agreement sets out the terms upon which money has been lent. It is an essential document for a lender to be able to enforce the terms of the loan and show that the loan was not a gift.
Standard terms of loan agreements include:
- The amount of the loan;
- The purpose of the loan;
- The interest rate of the loan;
- The period of the loan;
- The monthly repayment amount;
- Security of the loan;
- What constitutes an event of default; and
- The consequences of an event of default (e.g. penalty interest).
Division 7A Loans
A division 7A loan agreement is a special type of loan in which a private company lends money to a related party such as a director or shareholder.
It is essentially a loan agreement that covers payments, loans or amounts forgiven by a private incorporated entity which have not bee subject to tax and/or formed part of the assessable income of the recipient.
These types of loans are governed by legislation, in particular section 109N of the Income Tax Assessment Act 1936 (Cth) for all loans made on or after 4 December 1997. The interest rate and repayment schedule of such loans are determined by reference to legislative requirements, breaches of which may attract the attention of the Australian Taxation Office.
We have acted for several entities in relation to Australian Taxation Office proceedings concerning division 7A loans.
Personal Guarantees
A lender will often times require a borrower to provide a personal guarantee from a third party.
This is a common scenario in commercial lending where a company is the borrower but the director is a guarantor of the loan, meaning that they are liable for the full indebtedness of the borrower in the event that borrower defaults on its loan obligations. Suffice it to say, providing personal guarantees are not something which should be done lightly. Banks in Australia are subject to the National Credit Code for their dealings with members of the public in the course of their business.
MC Lawyers assists businesses and individuals with tailored advice or drafting for a wide variety of loan agreements on a fixed fee basis, ranging from the most simple personal lending arrangement to complex syndicated facilities.
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