BlogContracts & TransactionsLegal ResourcesLoan Contract: The Mean Justifies the End

September 18, 20210
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People take loans for different reasons – from the need to pay for college, to the ambition of starting a new business. Loan agreements may be simple or complex. It depends on the involved parties and the nature of the agreement. 

A simple loan agreement is the one drafted between family members materializing as the object – a certain amount of money. In principle, siblings tend to act in bona fides toward each-other. However, a written document does not diminish the amount of faith. On the contrary, it makes parties more aware of their rights and obligations. 

The Albanian Civil Code acknowledges partie’s contracting freedom for as long as they comply with the legal binding requirements. Otherwise the validity of the act might be affected. 

 

Starting with the basics – What is a loan contract?

 

A legally binding document framing the terms and conditions of the Loan. The lender (the person who lends) gives to the borrower (the person who borrows) the ownership of an amount of money or objects. The number, the weight or quality/type of the objects should always be specified – in order for the handback to be in the same form. 

For example: A merchant lends his subcontractor the amount of 1500 EU and a Dell XPS 13 9300 laptop. In the contract they stipulate a one year term for the subcontractor to handback 1500 EU and the laptop. 

Parties are free to have an unlimited term contract. In this case, the borrower should handback the money/object at the request of the lender.

The Supreme Court acknowledges the contracting freedom as the borrower’s right  to manage or use the borrowed money at his/her best interest.  In the decision no 932 dated 22.6.2000 the Court has ruled:

“In any case, in a loan agreement, the lender has no right to interfere in the way the borrower manages or uses the borrowed money. In this contract the lender has the right to demand only the repayment of the amount lent, as well as the stimulated interest, if the borrower has assumed such an obligation. Eventual risks, arising from the administration of the borrowed amount, from its investment, or from the performance by the borrower with this amount of other legal actions in order to increase profits, always weigh on the borrower.”

 

What makes a loan contract so first-rate?

 

Interest rates! Usually the interest is paid annually. Anyhow, the parties can choose either not to put an interest rate on the loan, or to have the repayment in monthly installments. 

However, if the interest rate is set up – and the borrower doesn’t comply with his/her repayment obligations on the interest rate – this constitutes an essential breach of the contract. 

 

Default Clause 

 

Parties should lay out what constitutes a default, and provide the adequate remedies in such an event. The default might be caused by both of the parties: the borrower and the lender. 

From the previous example: Parties set the method of installment payment. The borrower should make 3 (three) payments of 500 EU, plus the interest rate, until all principal and interest is fully paid at the end of the year. But, if the borrower fails to pay two consecutive instalments, the lender has the right to ask for the immediate repayment of the borrowed money and the return of the borrowed laptop.

On the other hand, the lender is accountable if the loaned goods have flaws which might damage the interest of the borrower. Unless he/she proves that he/she had no knowledge of the flaws. 

Eventually, you might have become curious to draft a Loan Contract. Using Legit you can enjoy some minutes as a Lawyer. The chances of drafting a contract without any expert help are higher after reading Legit’s advice

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