An essential guide to loan agreements
Thinking about borrowing money? Before you do, it’s important to understand exactly what you’re agreeing to.
A loan agreement is a legally binding contract between you and a lender. It sets out how much you’ll borrow, how you’ll repay it and any interest or fees involved. Whether the loan is secured or unsecured, understanding the terms is essential.
If you’re unsure what a loan agreement is or how it works, this guide will help.
We’ll cover:
- What a loan agreement is
- Why loan agreements are important
- What should be included in a loan agreement
- How interest is calculated and applied
- Your rights under UK consumer protection laws
- How secured loan agreements differ
- When and how you can cancel a loan agreement
By the end, you’ll hopefully have a much clearer understanding of your rights and obligations before entering into any loan agreement.
What is a loan agreement?
A loan agreement is a legal contract between a borrower and a lender. It confirms the terms of a loan and sets out what both parties must do.
The loan agreement explains:
- How much you borrow
- How you repay it
- What it will cost
For unsecured loans, the lender usually provides the agreement. It will include key details such as the interest rate, repayment schedule and total amount repayable.
For loans secured against property, the process is different. Instead of a single agreement, you’ll be issued with a mortgage illustration first. This is followed by a binding mortgage offer. Finally, to accept the secured loan, you’ll have to sign a legal charge. This protects the lender by using your property as security for the loan.
Why is a loan agreement important?
A loan agreement provides clarity and legal protection.
It ensures:
- You know exactly what the terms of the loan are
- The lender meets their obligations
- There is a clear record of the agreement
Some people think loan agreements only protect lenders. But this isn’t true. They also protect you as the borrower.
Only regulated lenders have the right to issue a loan agreement. You won’t get one if you borrow from someone who isn’t regulated, like a friend or family member. Without a formal agreement, borrowing money may be risky. Misunderstandings could be more likely, and legal protection is limited.
Are loan agreements legally binding?
Yes. Once signed by both parties, a loan agreement is legally binding. This means you must make repayments as agreed, and the lender must provide the loan under the agreed terms. If either side fails to meet their obligations:
- The lender could use the agreement as evidence in court
- The borrower could launch a formal complaint and raise the issue with the Financial Ombudsman Service (FOS)
Always read the terms of a loan carefully before signing. If anything is unclear, ask questions before signing.
What should be included in a loan agreement?
A loan agreement must clearly set out all the terms and conditions to be agreed by both parties.
For unsecured loans, this usually includes:
- Details of the lender and borrower
- The loan amount
- The interest rate (fixed or variable)
- The loan term
- The repayment schedule
- Any fees or charges
- The total amount repayable
- Signatures and dates
Every agreement is different, so always check the details carefully before signing.
Loan agreements aren’t quite as straightforward for secured loans. However, there are still various documents and legally binding contracts included in the process.
At Evolution Money, our secured loan agreements follow these steps:
- You’ll be issued with a mortgage illustration that outlines the details of your second charge mortgage. You’ll need to check that this is correct, and you’ll have time to think about whether the loan is right for you.
- Next, you’ll receive a binding mortgage offer. This will include all the terms and conditions of the loan. This is valid for 30 days, and you’ll be able to take the time you need to ensure it’s right for you.
- If you want to accept the loan and receive your funds, you’ll then sign a document called the ‘legal charge’.
How does interest work in loan agreements?
Interest is a key part of any loan agreement. It is the cost of borrowing money and determines how much extra you’ll repay.
A loan agreement should clearly explain:
- The interest rate
- Whether it is fixed or variable
- How often interest is calculated
- The total cost of borrowing
It’s also important to consider any fees associated with the loan. In many cases, you’ll have the option to either pay these fees upfront or add them to your loan balance.
Paying fees upfront means you won’t be charged interest on them. However, if you choose to add them to the loan, they become part of the amount you’re borrowing. This means interest will be charged on those fees over the life of the loan, increasing the total amount you repay.
Interest has an impact on the total cost of your loan. Even small differences in rates or loan terms could significantly change how much you repay. That’s why it’s important to read the loan agreement carefully and make sure you understand how interest rates work.
For more information on interest rates and what they mean, take a look at our blogs:
How are loan agreements regulated in the UK?
Loan agreements in the UK are regulated to protect borrowers. Lenders must be authorised and regulated by the Financial Conduct Authority (FCA).
The FCA rules ensure that lenders:
- Treat their customers fairly
- Provide clear information
- Follow responsible lending practices
- Act to deliver a good outcome
Always check your lender is authorised by the FCA before agreeing to a loan.
What are your legal rights when entering into a loan agreement?
By law, lenders must provide key details before you sign. These include:
- The total cost of the loan
- The interest rate and APR/APRC
- The repayment schedule
- Any fees or penalties
This helps you compare options and make informed decisions.
If a lender fails to meet their legal requirements, they may face fines or enforcement action. The agreement could be challenged, and you may be entitled to compensation.
Can I cancel a loan agreement?
This depends on the type of loan agreement.
For most unsecured loans, you have 14 days to cancel the agreement. If you’ve already received the funds, you must repay them within 30 days. After this, the agreement may only end if both parties agree, or the loan is fully repaid.
For secured loans, you cannot cancel after signing the legal charge. However, you can withdraw from any potential agreement until that point. If you wanted to end the agreement after signing the legal charge, you would need to repay the loan, any early repayment charges, interest due, and any fees.
Check your eligibility for a secured loan from Evolution Money
We offer secured loans for homeowners of up to £105,000, with flexible repayment terms from 3 to 20 years.
Whether you’re consolidating debt, improving your home or covering a large expense, we aim to provide a clear and simple process.
We are proud members of the Finance and Leasing Association.
Representative 17.46% APRC (Variable)
For a typical loan of £23,120 over 120 months with a variable interest rate of 17.46% per annum, your monthly repayments would be £442.07. This includes a Product Fee of £2,312.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £53,047.80. Annual Interest Rates range between 8.6% to 27.87% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
