What Is a Credit Agreement?
A person or party that is borrowing money and a lender come to an agreement on the terms of the loan through the creation of a credit agreement, which is a contract that is legally binding and documents the terms of the loan. The credit agreement specifies in detail all of the conditions that are attached to the loan. Credits agreements are drafted up for retail loans as well as loans made by institutions. Credit agreements are typically needed before a lender will allow a borrower to make use of the money that they have provided.
- A person or party that is borrowing money and a lender come to an agreement on the terms of the loan through the creation of a credit agreement, which is a contract that is legally binding and documents the terms of the loan.
- When applying for a loan of any kind, whether it be a mortgage, credit card, or auto loan, amongst others, you will need to sign a credit agreement as part of the application process.
- Credit agreements are frequently necessary before the lender will allow the borrower to make use of the money that was provided by the lender.
How Credit Agreements Work
Credit agreements with retail customers will be structured differently depending on the kind of credit that is being extended to the customer. Customers have the opportunity to submit applications for revolving credit accounts, credit cards, personal loans, and mortgage loans. The industry credit agreement standards vary depending on the type of credit product being offered. The borrower will typically be given the opportunity to review the terms of a credit agreement for a retail lending product when they fill out the credit application for that product. Because of this, the credit application can also function as the credit agreement if necessary.
Creditors are required to make complete disclosure of all of the terms associated with a loan in the form of a credit agreement. The credit agreement will include important lending terms such as the annual interest rate, the manner in which the interest will be applied to unpaid balances, any fees that are associated with the account, the duration of the loan, the payment terms, and any consequences for late payments.
In general, the application and credit agreement process for revolving credit accounts is easier to understand and less complicated than it is for non-revolving loans. Personal loans and mortgage loans are examples of non-revolving loans, and the application process for these types of loans is typically more involved. In most cases, the process of entering into a credit agreement for these kinds of loans is more formal. In the final phase of the transaction process, the credit agreement may need to be signed and agreed upon by both the lender and the customer. The contract is not considered to be in force until both parties have signed it, so this requirement is necessary for the contract to become effective.
Options for revolving and non-revolving credit are typically included in the terms of institutional credit deals. On the other hand, they are significantly more difficult to negotiate than retail agreements. In addition to this, they might involve the issuance of bonds or the formation of a loan syndicate. The latter occurs when a group of lenders invests jointly in a structured lending product.
Institutional credit agreements typically involve a lead underwriter. The underwriter is responsible for negotiating all of the terms of the financial transaction. The interest rate, the length of credit, the payment terms, and any penalties for late payments will all be included in the terms of the deal. Underwriters are also responsible for facilitating the participation of multiple parties on the loan, in addition to any structured tranches, each of which may be subject to its own terms.
Credit agreements with institutions require all parties involved to both consent to the terms of the agreement and sign it. In many instances, the Securities and Exchange Commission (SEC) must also be notified of these credit agreements and give its approval before they can be put into effect (SEC).
Example of a Credit Agreement
Sarah applies for and receives a car loan from her community bank in the amount of $45,000. She consents to a loan with a term of sixty months and an interest rate of five point two seven percent. According to the terms of the credit agreement, she is required to make a payment of $855 on the 15th of each month for the next five years. In the credit agreement, it is stated that Sarah will pay a total of $6,287 in interest over the course of her loan, and it also outlines all of the other fees that are associated with the loan (in addition to the repercussions that would result from the borrower breaking the terms of the credit agreement).
After carefully perusing the credit agreement, Sarah ultimately decides that she is comfortable with all of the conditions outlined in the document and signs it. The credit agreement is signed not only by the borrower but also by the lender; once the agreement has been signed by both parties, it has the force of law.
