Definition, Purpose, Execution, and Legal Implications of Loan Agreement

This article has been written by Sneha Awasthi during her internship with Le Droit India.

Introduction

A draft in law refers to a preliminary document that parties to a treaty or agreement intend to put their agreements in a formal and complete form. In the context of a loan agreement or contract, a draft is the first version, which usually contains the terms and conditions of the loan given, and under which the loan is provided, and how the loan is to be repaid.

The main purpose of the draft for a loan agreement is to enable clarifications of the obligations and rights between the lender and the borrower to be done clearly in the document before the execution of the final document. The drafting fulfils a negotiation function where the parties go through the provisions and propose changes. This would ensure that issues such as the quantum of the loan, rate of interest, the repayment schedule, and any additional clauses for prepayment or default conditions are devised mutually.

Execution

Once the parties are satisfied with the terms presented in the draft, then the instrument is finished and executed. Execution comprises signing the document, which therefore makes it a legal document. Any party to the agreement, which includes the borrower, the lender, and all guarantors, must sign the document in the presence of witnesses if so required by law. This finalizes the agreement, and the legal implications will have taken effect for all the parties involved.

The draft bank loan agreement is only executed with the aim of preparing a legal document. In case of any default under this agreement by any of the parties, the aggrieved party shall not only be entitled to seek legal remedies but also monetary relief by way of damages, specific performance, or any other lawful remedy available to such party under the terms of this agreement and the law. The said assignment, waiver, severability, and governing law clauses ensure that the agreement remains valid under any conditions or causes that otherwise render it invalid and even if there is a dispute between the parties.

Format of the Loan Agreement

This Loan Agreement (this “Agreement”) is executed as of this  10^th day of  September, 2024  (the “Effective Date”) by and between  Amit Sharma, located at 123 Green Park, New Delhi, 110016, hereinafter referred to as the “Borrower” which expression unless repugnant to the context shall mean and include its legal representatives, assignee, nominee(s), and administrator; 

And 

Rajesh Mehta located at 456 Blue Valley, Mumbai, 400001, hereinafter referred to as the “Lender” which expression unless repugnant to the context shall mean and include its legal representatives, assignee, nominee(s), and administrator.

WHEREAS at the request of the Borrower, the Lender has agreed to grant a Loan not exceeding a sum of  INR 5,00,000 (Rupees Five Lakh Only) to the Borrower for a period of 12 months on terms and conditions hereinafter contained.

The parties agree as follows:

1. The Lender agrees to loan the Borrower the principal sum of  INR 5,00,000 (Rupees Five Lakh Only) (the “Loan”), together with interest on the outstanding principal amount of the Loan (the “Principal Balance”), and in accordance with the terms set forth below.

• The Principal Balance shall bear interest at the rate of  10% per annum, accruing daily. Notwithstanding, the total interest charged shall not exceed the maximum amount allowed by law, and the Borrower shall not be obligated to pay any interest in excess of such amount.

• The Loan, together with accrued and unpaid interest and all other charges, costs, and expenses, is due and payable on or before 10^th September 2025.

• Sanjay Verma, located at 789 Rose Street, Bangalore, 560001 (the “Guarantor”) promises to unconditionally guarantee to the Lender the full payment and performance by Borrower of all duties and obligations arising under this Agreement. The Guarantor agrees that this guarantee shall remain in full force and effect and be binding on the Guarantor until this Agreement is satisfied.

• The Borrower has the right to prepay all or any part of the Loan, together with accrued and unpaid interest thereon, at any time without prepayment penalty or premium of any kind.

• Borrower shall pay to the Lender all costs of collection, including reasonable attorney’s fees, that the Lender incurs in enforcing this Agreement.

• The Borrower and all sureties, guarantors, and endorsers hereof, waive presentment, protest and demand, notice of protest, demand and dishonour, and non-payment of this Agreement.

• This Agreement will inure to the benefit of and be binding on the respective successors and permitted assigns of the Lender and the Borrower.

• This Agreement may be amended or modified only by a written agreement, duly signed by both the Borrower and the Lender.

1. Any notice or communication under this Loan must be in writing and sent via In-Person Delivery only.

1. Lender shall not be deemed to have waived any provision of this Agreement or the exercise of any rights held under this Agreement unless such waiver is made expressly and in writing. Waiver by Lender of a breach or violation of any provision of this Agreement shall not constitute a waiver of any other subsequent breach or violation.

1. In the event that any of the provisions of this Agreement are held to be invalid or unenforceable in whole or in part, the remaining provisions shall not be affected and shall continue to be valid and enforceable as though the invalid or unenforceable parts had not been included in this Agreement.

1. Borrower shall not assign this Agreement, in whole or in part, without the written consent of the Lender. Lender may assign all or any portion of this Agreement with written notice to Borrower.

1. This Agreement shall be governed by and construed in accordance with the laws of the State of Maharashtra, not including its conflicts of law provisions.

1. Any dispute arising from this Agreement shall be resolved in the courts of the State of Maharashtra.

1. This Agreement contains the entire understanding between the parties and supersedes and cancels all prior agreements of the parties, whether oral or written, with respect to such subject matter.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above.

SIGNATURES

Borrower’s Signature: Amit Sharma 

Borrower’s Full Name: Amit Sharma

Guarantor’s Signature: Sanjay Verma 

Guarantor’s Full Name: Sanjay Verma

Lender’s Signature: Rajesh Mehta 

Lender’s Full Name : Rajesh Mehta