CREDIT AGREEMENT: Detailed Guide on how a Loan Agreement Works

Credit agreement

When circumstances are rough, loans can be a valuable resource for businesses to help them weather the storm. Credit facilities, in particular, can be lifesavers. This sort of loan is an offer by a lending institution to extend credit to a business client, typically in the form of overdraft services, revolving lines of credit, or letters of credit. The credit agreement is a written document that details the loan’s terms. Continue reading to learn about common consumer credit agreement terms and act.

What is a Credit Agreement?

A credit agreement is a legally enforceable contract between a borrower and a lender that both sides must agree to. It secures the terms of any sort of credit, including overdrafts, credit cards, and personal loans. As a result, a credit agreement for a personal loan is often referred to as a loan agreement.

A credit agreement often includes the loan’s details and what you should know before engaging in a credit agreement. This includes details such as:

  • The sort of credit agreement and any policy specifics that may be associated with it (if applicable)
  • The cost of credit, including any interest rate fluctuations (if the loan has a variable interest rate) and repayment conditions
  • The total amount you must pay, including any fees or costs
  • When are payments due?
  • Your rights, including the right to terminate the agreement
  • Conditions for early repayments

When you apply for a loan, you must read and sign a credit agreement. Before signing, make certain that you understand and agree with the terms given.

Where can I locate my Credit Agreement?

Your reported Credit Agreements will appear on your Credit Report, providing you with a full summary of your current and previous lenders, amounts owing, account status, and more.

Because there are three UK Credit Reference Agencies that keep account information—Equifax, Experian, and TransUnion – you must review your reports at all three to guarantee you’ve seen everything they have on file for you. Because they are independent organisations, your reports at each may differ.

Your Multi-Agency Credit Report consolidates your information from Equifax, Experian, TransUnion, and Crediva into one, easy-to-use website, allowing you to easily see your reported Credit Agreements, just like a lender would.

What impact do my Credit Agreements have on me?

The main consequence of entering into a Credit Agreement is that you are obligated to repay a specified amount of money, usually monthly, until the outstanding balance is paid. However, your Credit Agreements are much more than just a monthly expense. Any Credit Agreements that have been shared with Credit Reference Agencies and hence show on your Credit Report will have a direct impact on your Credit Rating.

The impact of a Credit Agreement on your Credit Report is determined by how the account has been managed. In general, having a lot of Credit Agreements that show you paying on time and in full will help your Credit Rating, whereas having a lot of accounts with late payments or defaults would hurt it. As a result, it’s critical to understand not just what Credit Agreements you have, but also how they’ve been documented on your Credit Report. A solid account repayment history is essential for receiving further financing, such as a mortgage.

A Credit Agreement Example

Sarah obtains a $45,000 auto loan from her local bank. She agrees to a 60-month loan period with a 5.27 percent interest rate. According to the credit agreement, she must pay $855 on the 15th of each month for the following five years. The credit agreement states that Sarah will pay $6,287 in interest throughout the life of the loan, as well as all other expenses associated with the transaction (as well as the consequences of a breach of the credit agreement on the part of the borrower).

Sarah signs the credit agreement after thoroughly reading it. She agrees to all of the terms contained in the agreement. The lender also signs the credit agreement; once signed by both parties, the agreement becomes legally binding.

Is there anything more that credit agreements cover besides overdrafts, credit cards, and loans?

Other sorts of borrowing are also covered under credit agreements. Credit sale agreements, hire buy agreements, and conditional sale agreements are examples of these.

The Consumer Credit Act governs several agreements, including your rights when entering into a credit agreement. These are some examples:

  • The type of credit agreement you’re negotiating
  • The credit cost, including any interest rate charges,
  • The amount you’ll be required to pay
  • When are payments due
  • Your cancellation rights
  • Payback terms that require early repayment.

However, the Consumer Credit Agreement Act does not apply to some forms of credit agreements. These include to name a few, gas, electricity, or water metre agreements, mortgages, credit union borrowing, and money borrowed from employers.

Is it Possible to Cancel a Credit Agreement?

Depending on the conditions of the agreement, you may be able to pay out any remaining balance on a loan in order to pay it off sooner. Some will charge you a price for doing so, but if you decide you no longer want or need a loan within 14 days of taking it out, you may be offered a grace period during which you can return the money borrowed and cancel the loan.

Getting out of a loan or credit agreement

A credit agreement is formed when you obtain a loan or credit for products or services. You have the right to cancel your credit agreement if the Consumer Credit Act of 1974 applies. You have 14 days to cancel, which is sometimes referred to as a “cooling off” period.

#1. Check to see if your agreement is covered by the Consumer Credit Act.

Check your credit agreement to see if it is protected under the Consumer Credit Act. If so, it should be stated at the top of the first page. The Consumer Credit Act often applies to the following sorts of agreements:

  • unsecured personal loans
  • Debit and credit cards
  • loans for payday
  • buy on hire
  • catalogues
  • coupons for stores
  • shop financing and ‘buy now, pay later contracts

It makes no difference whether it was done in person, over the phone, via mail order, or via the internet or digital television.

#2. Inform the lender that you wish to cancel.

After signing the credit agreement, you have 14 days to cancel. Contact the lender and inform them of your intention to cancel; this is known as ‘providing notice.’ It’s better to do this in writing, but your credit agreement will inform you who and how to contact.

If you’ve already received money, you must repay it – the lender must give you 30 days to do so. You owe nothing if you haven’t previously signed the credit agreement.

You can also cancel and return something that you’re paying for with hire buy. If you want to keep the items, you must pay for them in another method. If you made a deposit or a portion of a payment for goods or services that you have not yet received, you should receive a full refund when you cancel.

Cancelling a new car rental purchase agreement

When you purchase a new car under a hire purchase credit agreement, the financing company pays the garage. You repay the credit company in instalments, with interest charged. If you want to cancel the agreement, you must pay the finance firm the remaining balance for the car within 30 days. Returning the vehicle to the garage does not terminate the agreement unless both the garage and the loan company agree.

Early Repayment

It is permissible to make early repayment on types of borrowing regulated by the Consumer Credit Act, but you must notify the lender in writing of your intention to do so. They will provide you with an early settlement amount, which is the amount required to pay off the obligation as soon as possible. The Consumer Credit Act also provides you with a statutory reimbursement for any interest or charges you have incurred. It specifies how to calculate this rebate so that it is not determined by the lender.

What if you are unable to make a repayment?

If you fall behind on your payments, your lender is required to send you an arrears notice as well as a Financial Conduct Authority (FCA) arrears information page. This is to inform you of your rights and how you can obtain assistance in dealing with the payment problem. Repayment defaults may appear on your credit report. Lenders may use this information to assess your creditworthiness if you apply for another loan.

Common Credit Agreement Clauses

The majority of credit agreement provisions are written to fit the situation. Credit agreements, on the other hand, frequently include some common conditions. Among these are provisions describing the following.

Facility Type/Nature

A credit agreement can involve more than one facility, either committed or uncommitted. The term “committed” refers to the lender’s obligation to make the loan once the borrower has met any prerequisite conditions (meaning a condition that must be satisfied before the loan is issued). Uncommitted loans are those in which the lender is not obligated to make the loan and are typically designated for short-term loans.

Size of the facility

This is the most that the financial institution will lend.

Unsecured or secured?

A secured loan is one in which the borrower provides collateral as an assurance that the loan will be repaid, reducing the lender’s risk. Real estate, for example, is frequently used as collateral to finance a real estate purchase loan. Some credit facilities are secured, but the majority are not.

The facility’s purpose

While not every facility agreement stipulates that the loaned funds be utilised for a specific purpose, the majority of them do. Lenders like to explain the goal in order to ensure that it aligns with the lender’s credit analysis.


The interest clause specifies the loan’s interest rate. Interest rates can be either fixed (a set rate that does not vary) or variable (based on an interest rate margin added to a benchmark rate, like the benchmark rate plus 3 percent).

Contractual obligations, representations, and warranties

These clauses detail the various promises and representations made by the parties to one another. It also includes a list of any exceptions to those pledges. It is critical to carefully analyse covenants since, according to our recent study, a large number of credit agreements are designed in such a way that borrowers can transfer assets intended to serve as collateral out of the grasp of lenders.

Default occurrences

An event of default is an act or omission that causes the borrower to default, such as failure to make a required payment or breach of a facility agreement term. If the borrower has multiple facility agreements with the lender, a cross-default provision states that any facility default represents a default on all of them.

Other expenses, fees, and duties to pay

This clause contains any prepayment fees owed by the borrower if the facility is repaid earlier than the term provided.

Credit Agreement FAQs

What must a credit agreement include?

A credit agreement includes two main features: First, there must be some postponement of repayment or prepayment, and second, the credit provider must levy a fee, charge, or interest on deferred payments, or the credit company must grant a discount on prepayment.

What is the main purpose of the credit agreement Act?

According to Section 3, the Act’s principal goals are to promote and develop South Africans’ social and economic well-being, to create a fair, transparent, competitive, sustainable, responsible, efficient, effective, and accessible credit market and industry, and to safeguard consumers.

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According to Section 3, the Act's principal goals are to promote and develop South Africans' social and economic well-being, to create a fair, transparent, competitive, sustainable, responsible, efficient, effective, and accessible credit market and industry, and to safeguard consumers.

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