Drafting Loan Contracts

3. Repayment Terms

The repayment terms are one of the most important elements of a loan contract, as they define the obligations and responsibilities of the borrower towards the lender.

The repayment terms should include the following information:

• The repayment schedule: The loan contract should specify the number, frequency, and dates of the repayments, as well as the amount of each repayment. The repayment schedule should be realistic and affordable for the borrower, taking into account the borrower’s income and expenses.
• The interest rate: The loan contract should state the interest rate that the lender charges on the loan, as well as the method of calculation and payment of interest. The interest rate should be reasonable and fair for both parties, and should comply with the applicable laws and regulations in the UAE.
• The penalties and fees: The loan contract should mention any penalties or fees that the lender may impose on the borrower for late payment, default, early repayment, or breach of contract. The penalties and fees should be proportionate and reasonable, and should not exceed the limits set by the law.

4. Security/Collateral

Security or collateral is an asset or a right that the borrower pledges to the lender as a guarantee for the repayment of the loan. Security or collateral can be in the form of a personal guarantee, a lien on the borrower’s property, a bank guarantee, a letter of credit, etc. The loan contract should clearly describe the type and value of the security or collateral, as well as the conditions and procedures for its enforcement or release. The loan contract should also state the consequences of the borrower’s failure to provide or maintain the security or collateral, such as the lender’s right to seize or sell the asset or to terminate the contract.

5. Cancellation Policy

The cancellation policy is the element of the loan contract that specifies the circumstances and conditions under which the lender or the borrower can cancel or terminate the contract. The cancellation policy should include the following information:

• The events of default: The loan contract should list the events or situations that constitute a breach or violation of the contract by the borrower, such as non-payment, insolvency, fraud, misrepresentation, etc. The loan contract should also state the remedies and actions that the lender can take in case of default, such as demanding immediate repayment, enforcing the security or collateral, suing for damages, etc.
• The notice period: The loan contract should specify the notice period that the lender or the borrower must give to the other party before canceling or terminating the contract. The notice period should be reasonable and sufficient for the parties to settle their obligations and claims.
• The termination fee: The loan contract should mention any termination fee that the lender or the borrower may charge to the other party for canceling or terminating the contract. The termination fee should be fair and reasonable, and should not exceed the actual loss or damage suffered by the party.

Other Clauses of the loan agreement

Besides the above-mentioned elements, a loan contract may also include other clauses that address various aspects and contingencies of the loan agreement.

Some of the common clauses are:

• Confidentiality clause, which prohibits the parties from disclosing any confidential or sensitive information related to the loan agreement to any third party without the consent of the other party.
• Dispute resolution clause, which specifies the method and forum for resolving any disputes or conflicts that may arise from the loan agreement, such as arbitration, mediation, or litigation.
• Governing law clause, which determines the law and jurisdiction that will apply to the interpretation and enforcement of the loan agreement, such as the UAE law or the law of another country.
• Force majeure clause, which excuses the parties from performing their obligations under the loan agreement in case of unforeseen events or circumstances beyond their control, such as natural disasters, wars, or strikes.
• Termination clause, which defines the conditions and procedures for terminating the loan agreement, such as mutual consent, full repayment, or breach of contract.

These clauses help to clarify the rights and obligations of the parties and to prevent or resolve any potential issues or problems that may arise from the loan agreement.