Don’t Make These Mistakes in Your Loan Agreements

Loan agreements are easy to draft, aren’t they? This includes how much is being loaned and how much and when the money has to be paid back. Pretty straightforward.

Except it’s not.

There can be a lot of terms, conditions, or wording in your loan agreements which can get you in trouble regardless of whether you are the lender or the borrower.

What Kind of Debt?

If the loan falls somewhere between consumer debt (generally defined as for household or personal use), or business debt, you may have a problem, because collection laws that apply to consumer loans don’t apply to business debts.

That means that if there is any ambiguity, you will want to state in your loan agreements what kind of debt is being borrowed. That way, you know what you legally can and cannot do, if and when the loan has to be collected after a default in repayment.

Ultimately, a court may decide which category the debt is, but if the borrower has already agreed that the debt is one or the other that will go a long way to making that determination.

Compound Interest and Other Fees

You likely are loaning money to make money on interest. You can charge interest, but avoid compound interest, or late or junk fees—at least, don’t put them in without speaking with an attorney.

These kinds of fees and penalties are all considered interest, and even if your base interest is not illegal (or usurious), those extra fees, fines, penalties, and interest on interest (compound interest) all legally count as interest. That means your effective interest rate may be usurious, even if the base interest rate stated in your loan agreement is not.

Post Judgment Attorney Fees

Getting a judgment against someone who doesn’t pay is one thing. Collecting on your judgment is another.

You can’t guarantee that someone has the money or assets to pay you back—but you can at least ensure that any judgment you get will provide you attorneys fees for anything you have to do post judgment, to collect on the debt.

Personal Guarantees

If you are loaning business or commercial debt, a personal guarantee can do a number of things for you.

It can serve as extra motivation for the borrower to pay you back, knowing that his or her personal assets are now at risk. It can give you an “extra pocket” to collect against in the event of default. And in the event the business goes under or filed for bankruptcy, you still have the ability to collect against the individual (or vice versa).

Notice of Default

Whether you want to give notice of default before having the right to collect, may depend on who you are. As a borrower, you may want notice, so that you aren’t hauled into court at the first nonpayment. As a lender, you may not want notice, if you do want the ability to go into court at the first sign of defaulting on payment.

Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954-440-3993 today for help with a loan agreement which works for you.

Sources:

leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699%2F0687%2FSections%2F0687.02.html

investopedia.com/terms/a/acceleration-clause.asp#:~:text=What%20Is%20an%20Acceleration%20Clause,repayment%20and%20the%20repayment%20required.